On the 5/20/23 Episode of “Real Estate with Mr. G”, we discussed the pluses and minuses of using median price in various Real Estate reports. Let’s break it down in more detail.

When it comes to assessing the value of residential properties, one of the most commonly used metrics is the median home price. In its simplest terms, the median home price is the middle price point of all the homes sold in a given geographic location within a specified time frame.

For example, if there were ten homes sold in a particular zip code over the course of a month, the median would be the price of the fifth home sold.

While certainly useful as a point of reference, median home prices also have several shortcomings that make them a less-than-perfect tool for accurately assessing property values.

One of the biggest issues with median home prices is that they don’t take into account the various factors that can influence a property’s value. For example, two homes may be located in the same area and be the same size, but one may have been recently renovated and include high-end finishes, while the other may be in need of significant upgrades and repairs.

Under the median price system, these two very different properties would be considered equal in value, even though they clearly aren’t. This can lead to misunderstandings among buyers and sellers who may be relying solely on median price data to determine what they should pay or list their homes for.

Another factor that can skew median home prices is the mix of properties that are included in the data set. For example, if there has been a recent surge in sales of high-end luxury homes in a given area, this can artificially inflate the median price. Conversely, if there’s been a larger than usual number of low-priced fixer-uppers sold, this can depress the median price, making it appear as if home values are declining when in fact it may just be an anomaly.

There’s also the issue of time frames. Median home prices are usually calculated on a monthly or quarterly basis, but the real estate market is constantly in flux. A median price from six months ago may not be reflective of what properties are currently selling for in that area.

Perhaps most importantly, median home prices don’t tell the whole story about the state of a particular real estate market. While it’s true that they offer a snapshot of what homes are selling for at a given moment in time, there are many other factors that come into play when gauging the health of a local real estate market.

For example, sales volume is an important metric that can give a better sense of how active the market is. If there’s a lot of turnover and many properties are being listed and sold, even if not at the highest prices, it may be a sign of a healthy, vibrant market. On the other hand, if sales are sluggish and few properties are changing hands, even high median prices may be masking a deeper malaise in the market.

So if median home prices have their limitations, what’s the best way to assess property values? The answer depends on a variety of factors, including the specific geographic market, the nature and condition of the property, and the intended use (i.e. primary residence vs. investment property).

In general, though, experts recommend looking beyond median prices and delving more deeply into other data such as sales volume, average price per square foot, and time on market to get a better sense of what properties are truly worth. They also emphasize the importance of working with a knowledgeable and experienced real estate professional who can provide local insights and market context.

All that said, median home prices do offer some value when it comes to assessing the broader trends in a real estate market. When combined with other metrics, median prices can help buyers and sellers get a general sense of what properties are selling for and how much demand there is in a particular area.

For example, if median prices have been steadily rising in a particular zip code over the course of several months, that may be a sign of high demand and limited inventory. Likewise, if median prices suddenly drop sharply in a given area, it may indicate that there’s been a glut of properties hitting the market or a significant shift in buyer demand.

In short, while median home prices have limitations as a standalone metric, when viewed in context with other data points, they offer a valuable glimpse into the overall health and direction of a local real estate market. Whether you’re a buyer, seller, or simply interested in following the latest trends in residential real estate, keeping tabs on median prices can help provide insights and context into the constantly changing world of real estate.