People like to use the terms “median price” and “average price” interchangeably, but they actually measure two completely different things. Here’s how you can tell the difference.
A few weeks ago, I brought back my “Monday Morning Coffee” weekly email with an analysis of average prices and indexes. I received a few different questions about them, so I figured I’d take a moment to answer some today.
First of all, if you took middle school math, you knew the difference between mean and median at one point. If you went to college, you probably also forgot it, just like I did.
Let’s say there are three houses that sold for $950, $1,000, and $1,050. The mean is the average number, which you get by totaling all three numbers and dividing them by three. This gives you $1,000 as the mean. This also happens to be the median of these three homes.
The best way to think of it is that the mean is the average price of all the houses, while the median is the price of the average house.
“If the median price is growing faster than the mean, we’re in a healthier market.”
Here’s where it gets interesting. Let’s say that we sell two more houses for $950 and $2,050. The median stays the same because the middle house is still $1,000. The mean, however, has jumped up to $1,500.
Whenever you see that the median price is growing faster than the mean in real estate, that means we are selling more homes in general. If the mean grows faster, that means we sold a whopper that brought the entire average up.
In times where we have a healthy robust market, we see the mean price increase faster than the median. In times where things are a bit slower, we see the median rise faster than the mean.
Next time, we’ll answer some questions about indexing, especially the Case Shiller Housing Price Index.
If you have any questions for me in the meantime, feel free to reach out via phone or email today. I look forward to hearing from you soon.
