Median House vs Average House

The question posed is, what is a better market indicator, the Average Home Price or the Median Home Price, and what's the difference?

People tend to get confused between median and average, and many people believe it to be the same thing. Everyone knows that an average is the sum of the group divided by the number in the group. That works well with batting averages and things of that nature, but when you start using numbers that can have large skews on the high or low end, the median is a much better indicator.

I typically think of median home price as "What can I realistically buy the typcial house in that neighborhood/town/state for?" The median will represent that number far better than the average. Here's a real esample for a search I ran today. If a buyer wanted to buy a home in the 85262 zip code, under 1,400 sq ft, I would come up with a median home price of $409,900, yet the average price would be $2,126,000. Can you imagine being a home buyer and asking "What's the average home price for homes under 1,400 sq ft in the 85262 zip code?" Then you get the answer of over $1.2 Million. If that buyer was qualified for a $500,000 home, based on the average home price, they would think they couldn't find anything in that area, even though there are only 2 above $500,000.

How can this be? This is the perfect example of how numbers outside the typical range can greatly skew a number. In the above example there were 5 homes available between $369K - $449K, one home at $875,000 and the last home was $12 Million. When averaged out, the total comes to over $2.1 million.

So, the answer to the initial question is clearly the median home price is a far better indicator. It tends to track the "typical home" in a neighborhood, and isn't as subjective to huge swings due to sales on either extreme.

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