For first-time home buyers, as well as existing homeowners looking to buy, a question commonly asked is: “How much home can I afford?” Taking a look at home prices can give buyers insight into what type of home may fit within their budget and whether they can afford homes in the area they are wishing to move to. This brings up another good question: what does the home price mean?
Simply put, the home price means the price that a property is agreed to be sold at. Understanding home price can be a useful tool for buyers looking to get the most value for the property they are about to purchase as well as understanding what types of home they can afford within their budget. As typically, similar homes within the same area are usually similar in price. For sellers, home prices help them understand what they may make off the property they have listed for sale or if the market is right for them to sell. Standard measures of home price include the median and average home prices, which are similar, yet have distinct differences.
These home price calculations do not include the asking price of home, which may not reflect the property’s value. Instead, determining home prices relies on sold homes, which reflect current values, a number rooted in the amount that buyers are willing to pay for similar properties.
Average Home Price
The average, or mean, home price is calculated by adding the selling prices of homes sold within a specific area and time and dividing the total sum by the number of properties sold. This metric is useful for understanding what, on average, homes in any given area are selling for.
Median Home Prices
The median home price is the middle value in a set of home prices, with half of the prices above the median and half below. Median prices are often an indicator of real estate market trends, with falling prices favoring the buyer and rising prices favoring the seller. Falling median home prices may indicate that the time is right to buy a home, with sellers potentially possessing more bargaining power in their negotiations on a sale price.
Mean vs. Median
Real estate agents often agree that median home prices are a much more accurate way to evaluate home prices within a neighborhood, city, or state. Average home prices are easily skewed by outliers, such as homes that sold for uncharacteristically high or low prices for the area. Average home prices that skew high can give buyers the false impression that the area is out of their price range, while low-skewed averages may be unaffordable for a buyer’s budget.
Let’s take a look at some numbers to give us a better idea of how home prices are calculated. Homes are sold within a neighborhood for $93,000, $98,000, $113,000, $122,000, $127,000, $131,000, $133,000, $350,000, and $412,000. In this example, the average home price is just over $175,000 while the median price is $127,000. If the two outlying, high home prices are removed from the equation, the average home price falls to nearly $117,000. By using the mean home price the outliers do not have the same impact on the data. This makes it a more accurate way to measure the average (mean) home prices within an area. If there were homes that sold even higher than the outliers in the data set, the average home price would have been considerably higher, giving a false representation of the majority of home prices that are being sold.
The difference between the two metrics can influence the decision of homebuyers when selecting a home. If they are looking at average (mean) home prices, skewed means can convince them that the area is unaffordable, when in reality, it may be.
For homebuyers, a careful analysis of home prices is an important aspect of being an educated buyer. Home price data can help buyers make smart buying decisions, such as not paying too much for a home when similar properties sold for significantly less. At the same time, home price data can also determine whether a buyer should focus their property search elsewhere, as median home prices are outside of their desired budget.
