# I understand the difference between average and median sales price, but which figure is more useful when comparing neighborhoods or making an offer?

Asked by Susan, Sat Aug 13, 2011

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For those who don't know: the average sale price is determined by adding all the sale prices and dividing by the number of sales. This number can be skewed by a very low or high price, called outliers. Sometimes it's appropriate to discard the outliers and recalculate the average without them. If the number of sales is small, the average sale price can be pretty meaningless.

The median price might be more useful. The number of properties that sold for more than the median price is the same as the number of properties that sold below the median price. Another way to look at this would be to list all sale prices in order from high to low. The price in the middle of the list is the median.

In July, the average sale price of all single family houses, manufactured homes, condos and townhouses in Tucson was \$173,141. The median sale price of all types of homes was \$125,000. Big difference. This indicates the most of the sales are occuring in the lower price ranges.

The average July sale price of single family homes in Tucson was \$185,492 and the median was \$134,945.

These data came from http://www.tucsonrealtors.org/tar-v2/statsJuly2011.pdf

So, how do you use this information to compare neighborhoods and make an offer? First, it's important to know whether you are looking at average and median list prices or sale prices. The sale prices willl be lower, and they are the only meaningful prices. The price for which a seller wants to sell his property is the wish or the dream. What a qualified buyer is willing to pay is the the reality, and it's the basis for determining how much to offer for a nearby property.

The only thing you can determine from the average and median sale prices is that recenlty, the properties in some neighborhoods have sold for more than they have in another neighborhood. This doesn't mean that in general, the properties in one neighborhood are worth more than the properties in another neighborhood. The prices in one neighborhod may be temporarily inflated by the recent sales of several of newly renovated properties. The prices in another neighborhood may be temporarily deflated by the recent sale of a number of foreclosures and short sales. And unless the property is in a newer subdivision where every house is the same size, and in the same condition, and sold under the same terms (no such place exists, by the way), the average and median sales prices tell you nothing about the value of any particular house.

It's more important to look at the sale price in terms of dollars per square foot. While this still doesn't tell you what a property is worth, it's a starting place for evaluating a 1,600 square foot fixer-upper sold as a short sale to the 1,200 square foot, newly-renovated house next door owned free and clear by an investor.

In other words, determining what a house is worth is not a simple matter. There are many factors to consider.
1 vote Thank Flag Link Sun Aug 14, 2011
If you're asking about a price to offer for a home, specific sales similar to the home you're planning to bid on will be helpful. Same bedroom/bathroom configuration, similar amenities - that's how an appraisal will set value on "your home". Comparable homes are selected and adjusted (offset) up or down depending on how they compare specifically to your home. For example, a fireplace in your home will adjust downward in a recently sold comp without a fireplace.

You can track median sales prices across neighborhoods to tell you what's happening in that area. If median prices are dropping, it means more homes in lower price range are selling. If the median sales price is increasing, it means more sales at the higher end are happening. That's why I like median sales as a trend evaluator more than the average. A few very low or very high sales prices can skew the average. The median is a more robust number. It's the point at which there are an equal number of sales above and below it, eliminating the chance of a misjudgement.

You don't mention if you're working with a Realtor, but a good Realtor can help you with those evaulations and many other factors you may not think to consider. And it won't cost you a penny.

I'd be happy to refer you to a few I think very highly of as buyer's agents.

Good Luck, Catherine
I would say neither! Nor would I use per sq ft - you want your Realtor to compare apples to apples. Appraisers will look at homes within the same subdivision or a mile radius (if it's not a typical subdivision). Then you want to look at homes 300 sq ft larger and smaller. Next, look at amenities to find homes as close as possible, then make adjustments as needed. I.e. comp has a pool, yours doesn't, comp has granite, yours doesn;t. Per sq ft is soo misleading!
In Tucson, the houses that generally fell the most were the homes built around 2004-2007 in the more distant communities - Vail, Catalina, etc. Also hard hit were communities around the airport. It seems there were many buyers who used low or no money down mortgages and may have stretched to afford the mortgage payments. When the values fell, and gas prices increased, foreclosures were more common in those areas initially. Clearly now, there are foreclosures throughout the area. Home prices around the University and in other established areas did not seem to fall as much. Which areas will come back first? As you said you have a brain, so your guess is as good as mine.

One foreclosure in an area will not impact values dramatically. Appraisers need to use a minimum of 3 comparables, but most areas do have foreclosures and short sales, it is now a large percentage of the market and accordingly, are included in the comps on appraisals.
Thanks everyone for your thoughtful replies. I realize that using price per square foot is the best way to go, taking into account the type of neighborhood, condition, etc. But I'm also interested in trends - what impact does one low foreclosure have on a neighborhood; how much less should I offer on an REO property; which neighborhoods have held steady based on average and median sale prices, etc. And which ones are likely to bounce back when the market stabilizes.

And to everyone who suggests asking a Realtor, well um, yeah. I already have one, but I have a brain, too. His role is to guide me and pull the trigger on the paperwork, but I like to do my own research. In fact, I know some neighborhoods better than he does.
Dear Susan:

In a neighborhood with a mixture of custom and tract homes with wide variances in value, the median price might be a better estimate of value. The reason, some of the custom larger homes may swing the average. Unless of course you are consdering one of the more expensive homes. Then you want to evaluate on a more selective basis and not just neighborhood values.

The median and average works the best in a neighborhood buillt by one builder with a few models.

jeff Masich
HomeSmart Realty
Arizona Homes and Land
Web Reference: http://ArizonaHomesLand.com
Jonathan, it's just a matter of arithmetic.

If all you know about a neighborhood is the average sales price and the median sales price, what can you determine from that knowledge?
Mack - how many neighborhoods in Arizona have you seen where there's such a wide swing in home values? Or are you guessing based on your knowledge of Seattle, not Arizona?

With my clients, we look at average price per square foot and adjust as necessary from there - not much different than what you'll see an appraiser do.
The average and the median prices are usually way too broad to real useful. Your licensed and experienced Realtor is the best guide. They take into consideration of all of the points of the home, cost, condition, clutter and only compare to homes in that area. That gets it specific to that home and location. The average and median numbers are just "guides" and should only be looked as general information on the overal area and market. Put your trust in your Realtor.
Susan,

We recommend doing your own research with the support of your agent and arriving at your own price point before even considering the average or median sale prices. This information can be weighted one way or the other by inappropriate comps and should be used only as a mild reference.

Arriving at your own information will better prepare you for being able to make an offer that is an accurate reflection of the local real estate market and make you better prepared to defend it.

Crunch your own numbers....you may be happy you did!

Good luck,

Bill
Well, Susan, the way we'd look at it would be to figure out how useful knowing the average sales price would be when comparing neighborhoods or making an offer, then figure out how useful knowing the median sales prices would be.

Knowing the average sales price is not really useful at all. Three big sales of \$10M each can move the average more than thirty sales of \$25,000 each. Knowing the median sales price is only useful if we know where the property falls in the median - if it is, say, in the 70th percentile, knowing the median may helpful, but maybe not helpful enough.

You should know that no professional in real estate uses the average or median sales price to either compare neighborhoods or to make an offer.

All the best,
Average and median sale prices are used for statistical purposes by the government and large financial institutions. To a buyer they are indication of economic/financial status of particular neighborhood. To determine this there is much easier way - drive trough neighborhood and look at houses. If there are "open houses" - visit them.
Price of the individual property can only be estimated by CMA performed by a realtor and verified by appraiser. If there is significant difference between CMA and appraisal - ask your realtor to explain it. Same thing goes for sale prices asked by a seller. Prices can be higher that market value justifies (by insistence of the owner) or unreasonably low (often in short sale - agent wants offers).
You may read my earlier post related to finding open houses http://www.trulia.com/blog/george_szkup/2011/05/tucson_real_…

George in Tucson
I agree with Spirit look at previously sold properties for a comparison. And they need to be sales within a mile radius. Average and median sales are useless when it comes to making an offer.
Work with a local agent or Realtor. I look at past sold comps in subdivison, & if none available then consider surrounding area. Any property, in this market is only worth what it appraises for. A local agent or Realtor will have access to more information from MLS than you can gather on your own. Best of luck. Spirit