The Median Price Explained to Laymen
House hunters look for various indicators in the pursuit of making an informed decision. After all, their home or property investment is the one at stake, and it’s but normal for them to make sure those indicators will lead to something good. One smart indicator that they use is the median price. Why is median price such a good indicator?
To understand this better, let us first understand how it differs from the average price. Let’s assume there are 9 different properties and they are priced at $4 million, $4.5 million, $5 million, $5.5 million, $5.8 million, $6.2 million, $7 million, $11 million and $14 million. And if you ask me why the last two values have shot past the ceiling, here’s a newsflash for you: because they can!
Now, the average price is the sum of all the 9 values divided by 9. In this case, it will be (4+4.5+5+5.5+5.8+6.2+7+11+14)/9 = 7.
Having derived $7 million as the average price, let us now take a look at what the median is and in this particular case, what may be the median price. The median is defined as the middle price of any given list. In this case, we have 9 values in the list. The central value is the 5th value which is $5.8 million, which therefore will be the median price.
Why is the median price a better indicator?
Median price is a much better indicator than the average price, and the line of reasoning is pretty simple. One or two really high sales can push the average price a lot higher. If you refer to the above case, you will find that the last two prices, $11 million and $14 million, have caused the average price to shoot up to $7 million. Suppose these last two prices were not there and only 7 values had to be judged for determining the average price. In that event, the cumulative of the first 7 prices would have been $5.42 million.
Average price can give a skewed stat
It is not hard to infer that the average price can sometimes fool us with a skewed stat. Even the median price can shoot above or below the range but this will only happen if a change in price occurs across the upper or the lower spectrum.
It is easy to figure out that the median price is one of the best indicators when we look at a very high number of values. While it may not suffice for house hunters to look only at the median prices, it can at least give them an idea how prices have moved over the present cycle and what the trend may be pointing towards.