March 2016 – For decades, the generally accepted method of tracking home prices is the median value. It is a more stable indicator than the average value and less subject to volatility caused by price flyers. It is significantly more representative of the true state of the market, and that is why it is used.
A price flyer is a home that sells for at least twice as much as the second highest sale price or less than half as much as the second lowest sale price.
It’s useful to compare the effect of a price flyer on a set of sale prices, using both the median and the average method.
Consider 5 homes sold as follows: 1. $297,000 2. $355,000 3. $421,000 4. $499,000 4. $575,000. This is a short list and the values are relatively close and evenly spaced, so the effects will be magnified.
The Median is the #3 home, the center of mass of the list, $421,000.
The Average is the sum of all 5 prices, divided by 5, $429,400.
If we toss in a high flyer at $1,500,000, nearly three times the previous high price, the median is now found by taking the average of the two middle prices, since the list is now an even number, while the average is the sum of all 6 prices divided by 6.
The Median is now $460,000, while the Average jumps to $607,833!
If we use a low flyer at $50,000, the Median drops to $388K and the Average plummets to $366,167. If the flyer had been $100K, the Median would be the same at $388K, while the Average would have fallen less to $374,500.
Using the average to chart price data usually results in a lot more “noise”, or big swings in the reported number than using the median, and this is the main reason that the median value is much more widely used. People who work with data want to minimize noise so trends can be clearly seen.
The table shows monthly SFR sales data for Nevada County for 2010, expressed as both Median and Average. In every case, the Average is higher than the Median, and the variation between Median and Average for a given month varies widely, from about +$10K (3%, Mar 2010) to nearly +$100K (30%, July 2010).
The moral of the story is that Median prices are here to stay for a number of good reasons. Occasionally, a discussion of home values using Average will be seen. It’s a flyer. The alert reader will not be misled into thinking there has been a big price jump since reading last month’s report!
Paul Sieving is a Realtor® with MacLeod Sierra Realty, a former Director and MLS Chair of NCAOR, Past President of the Nevada City Chamber of Commerce (2015) and Grass Valley Chamber (2004), and has served our community as a real estate professional for 17 years. Comments, questions and thoughts are welcome at This email address is being protected from spambots. You need JavaScript enabled to view it. or (530) 274-0906.
