L A South Bay Real Estate

Which is more important; Average Price or Median Price?

Posted on 18. Jul, 2010 by Barry Brickel in Market Forecasts, real estate news, Uncategorized

Median Home Prices vs. Average Home Prices What is more meaningful in analyzing home prices, Median Home Prices or Average Home Prices? The media relies very heavily on Median Prices, almost entirely, Average home prices are rarely mentioned. On the LA South Bay Real Estate blog we include both on the home price graph this is usually the top graph listed in our monthly report. There is a great deal of controversy in the industry as to which is the more important measure of home prices. We define Median prices as the value in which half of the homes sold above and half of homes sold below. This is more of a measure of the price segment of homes being sold not their actual value. In other words the public may be buying low end or high end homes. Average prices is defined by the sum of the sold prices divided by the number of homes sold. The Average prices dependent on the cost of each unit price, high end or low end priced home each sale price affects it's value. I am in the camp that believes Average home prices is the more important indicator as far as determining the trend of real estate prices. The Median prices are an important indicator of the price segment that the public is buying. Here is a quick analysis that was performed using Microsoft Excel which illustrate the differences.

 There are six different sets of sale taken for the comparison reflecting different market conditions. In Data Set 1 the Median is calculated at $500,000 with sales above and below $500,000. The calculated value is $500,000 and The Average value is calculated at $533,508. Each change in any of the sales prices will change the Average value. The value a #6 will be the Median as long as there are an equal number of sales above and below no matter what the actial value is. In Data Set 2 the market was weaker with lower sales prices in the lower end the Median remains the same, which tells us very little about which way the market is moving. The Average price is down which is a result of the lower prices, we learned nothing from the Median value. In Data set 3 the upper end prices increase during a strong market. Again the Median prices remains the same but the Average price goes up giving us valuable information. In Data set 4 we kept the same values under the median price as given in set 1 and lowered the prices above the median price, again Median price remains the same and Average price is telling us what is happening as a result of these price changes. In Data set 5 we increase the sold values under the median price and we get the same type of information. Finally in Data set 6 we increased the sale prices dramatically above the median price, of course the calculated value of Median price remains the same and tells us nothing as to what the market is doing but the calculated average price tells the whole story. Which do you think is the more important indicator? Please send your comments.