How Mean, Median, And Mode Are Used In Real Estate Reporting
You might know that mean, median, and mode are all names for "average," but do you know how they can be manipulated for real estate reporting?
Before you [Yawn] away this article, I want to let you in on a little secret.... You know, it's been said that "they" can make numbers mean anything they want them to say? Well, it is true. People haphazardly deploy terms like “average”, mean, median, mode and other statistical terminology without either understanding what they’re talking about themselves, or with the intent to deceive their audience with ‘fact’.
So today we are going to take a look at ten year's worth of Tallahassee real estate data and show you how average home prices have changed and how the mean, median and mode will give us different insights into what these averages can mean.
Real Estate Mean, Median and Mode
Before we get to the real estate specific examples, let's quickly review the definition of each term:
- Mean - The sum of values divided by the number of values.
- Median - The middle value when the values are ranked.
- Mode - The most frequently occurring value.
Technically, these all can be referred to as "average," but as you might expect, "average" can be manipulated to explain things from different vantage points.
So let's take a look at the mean, median, and mode of home prices in Tallahassee, from 2003 to present, in order to see how this information can be used in our real estate reporting.
Mean - The blue line in the graph above is the mean home price, and this version of average is most often used when people report "average" home prices. Why? Because it is the easiest to generate. It's a simple function in a spreadsheet, and we can produce mean home prices with very little effort.
But when we use the mean to report "average," we allow outliers (values that are unusual when compared to the rest of the data) to overly impact our findings. For example, in September 2009, the mean home price in Golden Eagle Plantation was $590,000. But the next month it jumped to $690,000 and it was reported that this popular NE Tallahassee neighborhood was appreciating through the roof. But that was not the case at all.
In fact, one home sold for $4,225,000, more than triple the previous record for the most expensive Golden Eagle home sale recorded in the Tallahassee MLS. By throwing the $4M dollar sale in with 33 other home sales that were all closer to $500K, it brought the mean home price for Golden Eagle way up. But if we looked at the median, one large sale had no impact on that "average." This often happens when a luxury home sells, it skews neighborhood averages (mean) far too high, thus a median view is far more beneficial.
Median - The red line in the graph above measures the median home price, and this is often a better "average" for us to be using with home prices and home values. Unfortunately, it is not as easy to calculate and it does not work well with tiny data sets, so we often only see it used with very large data sets (like whole Cities, States, etc.) produced by the large real estate aggregators. Additionally, not many real estate agents know how to generate them for neighborhoods or zip codes (but we can at the Tallahassee Real Estate Blog :)).
Mode - Finally, the green line in the graph above shows the modal home price. The mode would have very little value to us in home sales by returning the most often recorded price (since contract prices can often vary by pennies), so I have used the mode to find the "average" price rounded to the nearest ten thousands (so $149,900, $150,000, and $154,000 all return a value of $150,000).
The mode is not an often used statistic in real estate, but I would certainly monitor it if I were a home builder. Take a good look at the mean, median and mode in the graph above and what do you notice about the past year? The mean and median home prices are on the rise, and they range from $160,000 to $180,000. But look at what we see from the mode during this same time. In eight of the past 14 months, the most active price range has been $70,000 to $80,000.
A home builder can use the modal home value to find pockets of buyer activity for exploitation, but this low price range is not a feasible production point for a single family or townhouse builder.
Using Real Estate Statistics
You can use local real estate statistics to help you determine your best course of action when buying or selling a home. The housing market is fluid, and it moves slowly enough for an educated consumer to truly take in the supply and demand dynamic for his or her price range. You should use this to your advantage to negotiate the best deal.
If you would like to know more about how the mean, median, and mode in real estate can help guide you in your next transaction, just drop me a note and we can schedule a time to put real estate math to work for you.