WASHINGTON (MarketWatch) -- Question: I have noticed that some reports regarding housing prices reference "average" pricing while others refer to "median" pricing. Are both average and median considered roughly equally reliable measures of value? If indeed median pricing tends to get cited more frequently, why do you think that is? Just curious to get your take.
Answer: Median is the number that is the midpoint of the sample, or the central point of a set of data. To find the median, you would list all the data points and simply pick the entry in the middle of the list. Average, on the other hand, is the sum of all values in sample divided by the number of values.
So, if 100 houses sold for a total of $1 million, the average price would be $10,000, or $1 million, the sum of all the selling prices, divided by the number of houses in the sample. To know the median, you'd have to know the selling price of each house in the sample and then plot out the midpoint at which the same number of houses sold for more and the same number sold for less.
Averages can be skewed by occurrences at the extremes, however. For example, if one house sold for $1 million and nine houses sold for $10,000, the average would be $109,000, even though most of the places in the sample sold for $99,000 less. It works the other way, too: If nine houses sold for $1 million and one sold for $1, the average would be $900,000.10, about a hundred grand less than what almost everybody in the sample paid.
Medians, on the other hand, are a true midpoint that can be impacted only by the size of the sample. Once the number of houses in the sample is determined, there is only one midpoint.
Each statistical measure has its merits, I suppose. I'm neither an economist nor a mathematician. But to me, averages work best when they are looked at over time, whereas medians are better when the sample is more robust.
Not to knock anyone's numbers, but when the widely quoted National Association of Realtors publishes its monthly sales statistics, it does not cover all sales for that month. NAR's sample does not capture new-home sales unless they went through the multiple listings service, and many of them don't. (Actually, it does not include any sales outside electronic multiple list services, and in this day and age, there are still some of those out there.) Based on my experience, I consider the new-home market to be the sales leader. Prices in that sector tend to rise or fall first, and existing houses tend to follow suit.
Numbers published by the also widely followed Federal Housing Finance Agency capture only those sales of houses that were financed by mortgages purchased by either Fannie Mae or Freddie Mac, not once but twice, first when the homes were purchased some years back and, second, when they were purchased this time.
But not all houses are financed by Fannie or Freddie-loans. In fact, most expensive houses are not. Another drawback -- at least I think it is a drawback -- is that the homes in the sample change over time. Consequently, a house in a market where prices are otherwise stagnant may sell for more than it did in the previous transaction simply because the seller put on a new roof, changed the carpeting or threw on a new coat of paint.
The figures I like to quote are published by the FHFA too. But they aren't followed by too many people. Indeed, before the mortgage market meltdown, they were published by the little known Federal Housing Finance Board, an independent agency which was moved into the FHFA when it was created to ride roughshod over Fannie, Freddie and the Federal Home Loan Banks.
One reason I like the FHFB/FHFA figures is that they are ones used to determine the so-called "conforming loan limit," which is the ceiling on loans which can be purchased by Fannie Mae or Freddie Mac, which then package them into securities that are sold to investors. I also use them because they include new-home sales.
But my favorite has its shortcomings too. For one thing, it does not include sales that were financed by government loans. That tends to skew the numbers higher because typically, FHA and VA loans are used to finance less-expensive houses. For another, the figures I quote are averages. Therefore, they are best looked at over the long-term; not months, and not necessarily year-over-year, but, say, this year versus three or five years ago.
Update
"Shortly after I wrote you [regarding a dispute with our real estate agent over pricing] (Realty Q&A, Nov. 20, 2009), I was accidentally cc'd on a nasty email letter from the agent to her broker calling me and my husband crazy for wanting to increase our price. See previous Realty Q&A.
"The broker replied to all [I always love seeing people blunder with technology] advising the agent to only provide us with minimal service. She also added a few choice words. I took those emails to the president and various higher authorities within the franchise and explained my situation. They thought the agent's and broker's behavior so inappropriate and embarrassing that they were willing to provide me with a nonconditional release. We simply requested that they transfer the listing to a more competent office.
"Guess what? We not only got better service and more serious viewings, but we listed the house for $10,000 more, got an offer for $30,000 more than we would have with the other agent and actually are under contract right now -- just three weeks after the new listing! I'm sure what has happened here is not so typical but the power of my letter to the head of the realty company gave us an opportunity to be treated to a real professional (they gave us their top agent) rather then being held captive by two very incompetent folks."
Response
Well, shiver my timbers. Guess I read you all wrong. I thought you were being unrealistic because all the offers came in far below your asking price, when all along it was the agent who was doing you a terrible disservice. I humbly apologize.
One of the lessons here is that if you believe you have been wronged, take your complaint to a higher authority. More often then not, someone at the next level or the next level above that will listen. And of course, it helps to be armed with a piece of rather damning email too.
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