This morning's Denver Post carried a front page headline titled, "Tepid U.S. Forecast: Reports spawn housing concerns." Throughout the article (which was mostly about national housing statistics), the author used Median Home Prices to illustrate their points about trends in home prices.

But do most people understand what Median Home Price means?

Statistically speaking, "median" is the point at which there are as many items above as below. In a list of 5 numbers, the third is the median. This is true whether the numbers are 1,2,3,4,5 or 1,2,3,100,1000. So what does this mean for home prices?

Statsticians rely on median home price to show a midpoint of sales. They feel that it shows what a "typical" home is selling for since there are equal numbers of sales above and below.  What it does not, however, take into account is the distribution of sales and the effect on actual individual properties (which would be an onerous examination). The real problem comes up when consumers' tastes change and they start buying different types of homes.

In a down economy, buyers tend to take a harder look at their needs and may simplify what they buy. Let's look at the auto industry as an example, since cars are a more uniform commodity than homes (you can buy the same car anywhere in the country). Let's really simplify our example and assume that an individual car maker has just two typs of cars: a compact selling for $30,000 and a SUV selling for $50,000, and they increase the price of both by 10%. It is logical then that an analyst could correctly state that that automaker's prices rose by 10%.

Now let's also assume that because gas prices rose, the automaker sells fewer large SUVs and more small compact cars. Last year's sales were 40% compact cars and 60%% SUVs. This would mean that the median car sale was an SUV for $50,000. This year the company sells 60% compacts and 40% SUVs, so the median sale is a compact for $33,000 (remember the 10% price increase).

In this case, while the price of all cars rose by 10%, the median sales price dropped from $50,000 last year to $33,000 this year - a drop of 34% - because buyers purchased different types of cars.

Similarly, in a down economy homebuyers tend to purchase smaller homes. As there are fewer larger homes selling, median prices will inevitably come down - whether individual home prices rise or fall. 

Michael Kearns is a residential real estate broker with RE/MAX Alliance in Denver, CO. Contact him today if you are thinking of buying or selling a home in Denver.