In mathematics, an average is a sum of all values added up and then
divided by the number of values in the set. An average is used to come
up with a mathematical midpoint for all of the values.
In real estate, those values are the prices of homes or rentals, and
average prices represent the mathematical midpoint for the costs of
homes or for the cost of rentals.
For example, to calculate the average value of several homes in a neighbourhood, you would add together their prices.
$88,000 + $105,000 + $85,000 + $99,000 + $79,000 + $180,000 + $97,000 = $733,000
$733,000/7 = $104,700 (Approx.)
However, while an average is a quick and easy to come up with an
idea of middle points in regards to home or rental values, they are not
the most accurate measurement.
Outliers – homes that are selling at a much higher or lower prices,
or renting for a much higher or lower prices than others in the area –
can skew the results of an average.
With the previous set of numbers, the highest amount - $180,00 –
skews the results, so that the result is not fully indicative of the
price that one can expect when purchasing a home in the area. The median
price of $88,000 more accurately represents what one would expect to
pay for a home in the area.
For this reason, the median price – an actual midpoint of all values
in a set – is often used instead. Average prices tend to be used as a
rough, simple gauge of values while median prices tend to be more useful
in actual calculations of values.
Any investor is advised to consider the average price as a starting
point, but to use more accurate measurements when it comes to
determining property values in an area of interest.