Median, Mean and Average
What's the difference, and why should you care?






In Real Estate, when discussing numbers you may hear people using terms like "Median", "Mean" or "Average". For example, "average sale price" or "median income". These terms are simply mathematical concepts that are used to boil a group of numbers down to a representative sample of that group.

First of all, "mean" is simply another term for "average". So, really we are only considering two terms here - "median" and "mean", however I will refer to "mean" in this article as "average", since that term is more familiar to most people.

Average:

The idea of an average is pretty easy to grasp - we have all come across this many times in our lives. To compute an average, you simply add up the list of numbers and divide by the quantity of numbers in the list.

For example, lets say that there are five houses for sale in a particular neighborhood, and their list prices are:

House 1 - $80,000
House 2 - $100,000
House 3 - $110,000
House 4 - $120,000
House 5 - $150,000

The sum of the prices is $560,000. Dividing that by 5 gives us an average list price of $112,000.

Median:

Median is a similar concept to Average, and many times the median and average of a set of numbers will be fairly interchangeable, however there is an important difference. The median of a set of numbers is simply the number in that set where half of the rest of the numbers are bigger and half are smaller. If we consider our list of houses for sale again:

House 1 - $80,000
House 2 - $100,000
House 3 - $110,000
House 4 - $120,000
House 5 - $150,000

The median list price would be $110,000 (house 3) because house 1 and house 2 are both lower than $110,000 and house 4 and house 5 are both higher. Half of the numbers are bigger and half are smaller.

What's the difference?

As you can see in our example above, the average list price was $112,000 and the median list price was $110,000. That's not a big difference, and in many cases, it will probably hold true that the average and median are basically the same. So why bother with the median - why not just average everything? Lets go back to our example again, with one slight change. Consider the following list of houses for sale:

House 1 - $80,000
House 2 - $100,000
House 3 - $110,000
House 4 - $120,000
House 5 - $1,500,000

This list is the same as before, except we have increased the list price of house 5 from $150,000 to $1.5 million. The average list price has jumped to $382,000 because the expensive house is skewing the result higher, however the median list price is still $110,000, because half of the homes are listed higher and half are listed lower.

If you were describing the real estate market in this neighborhood, it would be accurate to say that the average list price is approximately $380,000, however this does not paint a true picture of the market. Most of the houses are listed for far less than $380,000! If you were to purchase a home in this neighborhood, chances are you'd be spending closer to $110,000 than you would $380,000.

It is in situations like these where computing the median can be more useful than the average. In cases where the data set is small or there are "outliers" (numbers that are much larger or smaller than the other numbers in the list) computing the median can help give a more accurate picture because it does not allow these outliers to skew the data as much as a simple average might.

This does not mean that a median should be always used instead of an average - depending on what you are attempting to calculate, one or the other might be a better match in a particular situation. For example, when computing a Housing Affordability Index that compares the cost of homes versus the income required to purchase them, analysts use median sale prices and median incomes. A detailed analysis of when to use median instead of average is beyond the scope of this article but in general, median is usually used when there is a chance that your data set contains extreme outliers, in order to try to obtain a more representative sample of your data.



Jon Steiger is a New York State Licensed Real Estate Broker and co-owner of Steiger Realty in Forestville, NY. For contact information and more articles like this one, please visit his real estate web page.



© 2015 by Jon Steiger, Licensed Real Estate Broker at Steiger Realty Cell: 716-673-5040
E-Mail: Jon@SteigerRealty.com Facebook /    Twitter /    LinkedIn /    Web Site