Average vs. Median Home Price

There seems to be a lot of confusion around the difference between average home price and median home price.  The truth is there is a significant difference, so let me see if I can clear this up. 

Average home price is a simple mathematic average.  You take all the homes you are referring to, add up all the sales prices together and divide by however many houses you have.

Median home price is something different.  The median home price is the actual house price that within the group of homes you are talking about, is the one with an equal number of homes above and below it. 

So take the following example.  Let's say the following is a list of 9 homes that have sold in an area:

$350K

$400K

$410K

$420K

$470K

$520K

$540K

$560K

$600K

The average in this example is $474K, and the median is $470K.  Not that much difference.  But there is a big difference if the distribution of home prices is not so even.  Imagine that a developer buys the last home and tears it down and builds a brand new home that sells for $1,800K.  Now the sale prices look like this:

$350K

$400K

$410K

$420K

$470K

$520K

$540K

$560K

$1,800K

Now the average is $608K but the median is the same $470K. 

The bottom line is that the average home price will almost always be a larger number and more prone to being an inaccurate representation of what a "typical" home is selling for in an area.   Median price is a better representation and a more stable number because it is not as dramatically affected by the less frequent high priced sale in a given area.

Rob = Math Geek