Real Estate Investments 101 -- Using The Median Price To Determine Property Value

Property Values

There are lots of methods to show the price of a piece of property, and among the most commonly utilised are median prices and average. While these two may seem similar, it's important to know the difference between one from the other since each one calculates property values in a different way.

The average rate of commodities is estimated by adding up each of the prices of properties in a list and then dividing the total by the number of properties listed. For instance, three properties valued at $150,000, $100,000, and $50,000 will have an average price of $100,000. Meanwhile, the median price is simply the center figure in a range of values; for instance, when you arrange a set of 101 properties from lowest to highest in accordance with price, the 51st property inside the list possesses the median value for that set.

There are times when average and median prices may be similar to each other. This happens when property prices are evenly distributed within the set. However, they become unequal whenever property values incline to one end of the spectrum or the other. For instance, if eight out of 10 properties have higher sale prices, then the median price is likely to be higher than the average. However, if 8 out of the set of 10 assets possess low values, then the median is more likely to be on the lower end also.

Due to the rather simple way median values are calculated, such price ranges usually provide minimal understanding on the condition of the housing market. This is certainly most apparent when the market is undergoing a change in selling prices; early drops or raises in property values are frequently not reflected precisely by median prices, and in some instances, the median price may exaggerate or play down the market’s present state. For the reason that not all property prices change right away in reaction to variations in the market, nor do selling prices display the same level of change. For example, in the beginning of a market slump, lesser priced properties are inclined to undergo the most substantial drops in value, while higher end properties are not quick to reflect the decline. This trend keeps median prices at a higher level, masking the decline in value that the majority of properties are already experiencing, ultimately making the circumstance look a lot better than it really is.

Even with its constraints, the median price continues to be regarded as a more suitable indicator of property values than the average price. It is because the median value isn't at risk from the effects of outliers - extreme values at either end of the selection range - and thus gives a better picture of market developments than average prices.