Median vs. Average Home Price

All the reports on home prices use the term “median home price”. Even for those that know what the term means, do you know how that reading reflects the current trends in home prices? Today we’ll explore median vs. average, how it corelates to home prices, and even more important, appreciation.

First let’s define the terms. In the most basic sense, “median” is the middle of a range of numbers. It differs from “average” because the median is based on the equal quantity of something below and above that number. Let’s use an example of 7 numbers (1, 7, 8, 12, 18, 19, 20). The median is 12. That’s because there are 3 numbers below 12 and 3 above. If you changed the numbers to (1, 7, 8, 12, 13, 14, 15) the median is still 12.

Average is taking all the numbers, adding them together, then dividing by the quantity of numbers. In our first set of numbers, the average is 12.4. In the second set the average is 10.

But let’s move away from math and explore how these terms represent what’s happening in the housing market.

The change in the median home price does not reflect a change in the price of homes. What it represents is the change in the price of homes people are buying. What? Okay, let’s try this using a fictitious example. Let’s suppose there’s a city or town where there’s no inflation, no home appreciation, no over-supply of homes for sale, nor a shortage. Homes generally take 2-3 months to sell. A developer completes a subdivision of small starter homes that are priced at the bottom of the market and sell quickly. As these homes sell and the monthly real estate report comes out, the median home price for the area will drop. That’s because of the increased number of sales below the current median price. The only way the media price would remain the same is if there was a corresponding increase in home sales above the current median price. What the median home price metric is telling us is a trend of sales of homes based on price-point. In our example, the lower prices homes that came on the market didn’t affect the prices of more expensive homes. The median only reflected a greater number of transactions of lower priced homes than those above the median.

In Hawaii we are now seeing yet again record median home prices. What that tells us is that there is either a preference for higher priced homes or there’s a lack of lower priced homes. For March, the median home price was $950,000. That doesn’t mean the average home sold for $950,000. That number represents that half the sales were below $950K and shockingly half were above.

To get back to our comparison of median versus average, for the same period, March 2021, the average home sold for $1,221,691.

Home prices are rising in Hawaii, there’s no doubt about that. The reason being a greater demand for what’s available. If you’re looking, you know people are in a frenzy and are bidding up properties. But due to limited inventory, sales are up, but not as much as you may think. In March 2018, 305 homes sold on Oahu. In March 2019, that number dropped to 267. In March 2020, just before the lockdowns, we had 314 sales. Now in March of 2021 we had 368. April will be a very strange report. It was April of last year when the full effects of the lock downs took place.

Because of this demand, the value of your home is significantly higher today than it ever has been. Even if you purchased your home a year ago, your home has appreciated significantly. If you did buy, and put less than 20% down, you have mortgage insurance. It may very well be possible to refinance today and eliminate MI immediately. Because of the volatility of the market, no one can tell you for sure. That’s where you’ll have to gamble the price of an appraisal to find out.

To wrap up our math class today, median is different than average, and really don’t play into what your home’s appreciation is. Median and average are used to give a sense of what’s happening with real estate sales. Conversely, appreciation is the value of your home today versus a point of reference in the past. The good news for those who already own a piece of Hawaii, your home has certainly appreciated in the past 12 months. It is important to note that appreciation is based on sales and varies from area to area. If you live in a sought after location, your appreciation will be greater than less desirable locations.