Median Ascends, But The Mean Ascends Faster - Home Prices

In the past several years, the Median price of homes (in my locale) has ascended slightly; but, the Mean has ascended much faster. How is this possible?

Although the ordinal median prices of homes in an area could slightly rise within several years, the mean price of homes rises much faster due to market demand and supply. Factors that include the average to rise faster are mortgage rates, new programs for the mortgagee/mortgagor, real estate property equity value, and additions to increase the property’s value. Why do these factors allow the prices of homes to rise faster? A glimpse of the real estate market in 2003 - 2005 portrayed new various programs allowing every type of household or person to purchase a home, to include the all time low in annual fixed and interest rate options.

With a variety of options and programs for any homebuyer, for example, the interest lows, the multiple options in interest rate programs, and the statistical fact of home price increase and equity value, more and more individuals wanted to purchase a piece of property/real estate to become a part of the market for investment purposes, or to reside in, prior to the mean price fluctuating or flattening to the point of stabilization. While the list of factors and different programs increase, the market supply of new homes is unable to meet the demand of the homebuyer/investor to purchase. Hence, the lottery program for newly constructed modeled homes. With the lack of new homes, the general population with homes already purchased, 1 year – 5 years before, will learn of the “sellers’ and buyers’” so called market. Since the real estate owner has noticeably previewed the overall market value for his or her home from comparable sales within the area, noticeably previewed the higher increase of monetary profit returned due to home value equity versus the current buy out mortgage value, and noticeably previewed the new options and demands of homebuyers, to his or her advantage, the will of a homeowner will sell to the highest offer to make a profitable amount for cash reserves, re-investing, or repurchase of a different property. Also, within the 1year – 5 years that the homeowner possessed his or her home, he or she may have added additions increasing the market value of the home; for example, such as extensions to living area, renovations on property structure, and additions of swimming pools or patios.

The Skinny…

The median price of homes in an area is the mid-point from the highest selling home to the lowest selling home; and the mean is the average price of homes sold.

Here’s an example…

Let’s assume that this year, June 2009, 5 homeowners in the same residential area are selling their homes. Homeowner 1 has no additions selling at $500k, homeowner 2 added a covered patio selling at $550K, homeowner 3 added a pool and covered patio selling for $600k, homeowner 4 added a pool, covered patio, and an extension selling at $650k, homeowner 5 added 2 pools, 2 guest houses, a spa, (2) two-level balconies with enclosed sunrooms, and twirly stairs, selling for $1.5 million.

4 of the 5 homes were sold and titles are recorded at the Bureau of Conveyances, with the exception of homeowner 5. The median price can only be determined by the factual values of homes sold, not by the assumption amount the home not sold is being sold for. An assumption of selling price is not as reliable as the factual sold price and cannot be used to appraise the value of property and record.

Therefore, the median and mean price for recorded value of homes sold is equal $575k. However, 4 weeks later, as homeowner 5’s home is still on the market, the home is sold for the asking amount, $1.5 million. Once recorded, the median price of homes within the area will rise slightly to about $600k, whereas the mean will rise much faster and larger in several months, at an additional $185k to total $760K.

Regardless of how low or how high the homes are sold for, each sold amount must be accounted for in order to mathematically determine the median and mean price. With these contingent factors, the prices of homes sold at higher values at a faster rate, will increase the mean more quickly than the median price, considering that the lowest price, sold for a home, remains a factor when determining the median price.