Median Vs Average Values in Real EstateWhat is the difference between median and average values? How does this affect your pricing strategy?
Let’s start by discussing the “average”, also known as the “mean”. This statistic is fairly easy to understand, as well as, to calculate. Just for purposes of this example, I want you to consider the current active properties (for sale) in your local market.
Compose a list of each active listing along with its asking price, or list price. A spreadsheet is very useful for this purpose. Next, we will calculate the sum by adding up all asking prices. Finally, we divide that sum value by the total number of listings. Voila! We just calculated the average asking price for listings in your market!
The median is also quite easy to understand and calculate. Let’s take another look at our list of active listing prices. We need to arrange this list in order from lowest price to highest. Once that is done, simply find the value that’s in the exact middle of the list. That value is our median asking price!
When our list has an even number of properties, our list will not have a single middle value, but rather we find 2 values that occupy the middle space. In this case, we simply take the average (add both numbers and divide by 2) to get the median value for the entire list.
Median values show a more accurate view of the market since they are typically less affected by large deviations in the data. For example, let’s assume that your data set includes 5 properties, as shown below along with their respective asking prices.
Property #1 … $350,000
Property #2 … $370,000
Property #3 … $310,000
Property #4 … $1,200,000
Property #5 … $335,000
The first thing you might notice is that one of these things is not like the others. Property #4 is priced much higher than the rest. This will have a significant affect on the average value, which happens to be $513,000.
To determine the median, we first sort the list in ascending order, then pick the middle value, which is $350,000. Comparing it to the average, the median value is a much more realistic interpretation of this market.