If you're shopping for a house, one of the biggest issues you have to face is how much you can afford and how you will balance that with the kind of house you want, in the location that suits you best. Real estate sources online and real estate agents often mention "average prices" and "median prices" when they compare prices in various areas, and those terms often cause confusion.
Phoenix, Tempe, Scottsdale, Glendale, and other cities in Arizona are all located within Maricopa County, the most populous county in Arizona. When you are checking out home prices, you might find them described as the average or median in Maricopa County or in the various cities within the county.
- In real estate, half of the homes in an area sell above the median price, and half of the homes sell below the median price.
- The average—or "mean"—adds up all of the sales prices and divides them by the total number of sales.
- Unusually expensive homes can skew the average price more than the median price, so buyers may prefer to look at the median sales price while considering a neighborhood.
Median vs. Average
The median of a set of numbers is that number where half of the numbers are lower, and half of the numbers are higher. In the case of real estate, that means that the median is the price where half of the homes sold in any given area that month were cheaper, and half were more expensive.
The average of a set of numbers is the total of those numbers divided by the number of items in that set. The median and the average might be close, but they could also significantly different. It all depends on the numbers.
Here's an example. Take a look at these 11 hyopthetical home prices:
- $1 million
- $3 million
The median price of these 11 houses is $105,000. That's arrived at because five houses were lower-priced and five were higher-priced.
The average price of these 11 houses is $498,000. That's what you get when you add up all of those prices and divide by 11. What a difference!
When you are looking at recently sold prices of houses, make sure you know whether the numbers are averages or medians. Both numbers provide good information, but they have different implications. If the average price in a particular area is higher than the median for the same time period, that tells you that the area contains significantly higher-priced houses even though in that particular time frame, sales were strong in the lower range.
Better Number to Use for Real Estate
The median price in a particular neighborhood is generally regarded as the more useful of these two ways of looking at prices. That's because an average price can be significantly skewed by sales that are extremely high or extremely low.
If you were looking at an area whose prices were reflected in the example above, and you considered the average price, $498,000, you might decide it is out of your price range and look elsewhere. But that number is distorted, because while most of the houses sold in the low $100,000s, the two at the high end drastically changed the average. If you remove those two seven-figure sales, the average is $164,000, which is still higher than the median but much closer to it than the other number. That's the effect that extremely expensive (or extremely low-priced) house sales have on average prices for an area.
On the other hand, if you look at the median price, $105,000, you might think that area was very affordable, and it's a much more accurate reflection of the prices of most of the houses sold in that location in that time frame.
Median vs. Mean
Now you can differentiate between median and average. But what's the difference between median and mean? This is an easy one: Mean is used to refer to arithmetic mean, one of the different types of mean. Mean and average are the same. They are synonyms, so the same logic from the example above applies.