All About Data: PRICES!

Welcome to the second installment of our new series: All About Data! Last week we introduced our new Think Heat Map and this week we’re talking about PRICES:

In real estate there are two different price metrics we have available to us: Median Sales Price and Average Sales Price. We prefer to use the Median Sales Price when looking at market trends and making forecasts.

What’s the difference?

Most people are familiar with Averages, but how does the Average Sales Price differ from the Median Sales Price? The Average Sales Price is calculated by adding up the price of each home sold during a given time period and dividing that number by the total number of homes sold. The Median Sales Price is calculated using the same data, but instead of adding up all the totals, we line up each price in order from lowest to highest. Then we determine which price falls exactly in the middle of those numbers to find the Median. Half of all prices are higher than the Median and half are lower.

Why use the Median?

We use the Median Sales Price instead of the Average Sales Price because the Median gives us a better understanding of a typical home price. The Median is unique because half of all prices are higher than the Median and half are lower. How high the highest price is (or how low the lowest price is) won’t impact the Median. Whereas with the Average Sales Price, a single very high value can skew the Average upward. In the example below you can see how one very large value increases the Average so that five of the seven values are actually less than the Average, and only one is larger.

When we analyze how prices are changing and try to anticipate what they will do in the future, looking at the Median Sales Price gives us a better understanding of the data. It shows us at which price a typical home is likely to sell. Due to the chronic shortage of housing in the Portland metro area, we don’t see many homes selling for far less than the Median Home Price, but we do have some homes that sell for far higher than the Median Home Price. For this reason, the Average Home Price in the Portland Metro Area has been higher than the Median Home Price for some time.

Check back next week for the next installment of All About Data: Price Trends!

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