Enlightened Capitalism

Essays about how to harness people's natural desire to create wealth and improve their quality of life to solve global problems such as war and poverty.

Friday, May 13, 2005

The Median

There is a lot of talk about median home prices in the news these days.

I watch this stuff very carefully, but I wanted to explain something so you can properly evaluate these news items when they come up.

The whole discipline of statistics is based on the desire to simplify the world. Instead of giving a list of home prices, the statistician gives one number, the median, and it is supposed to reflect the whole list of prices,or give you an idea of what a "typical" price on that list would be.

This sometimes works, but not always.

For instance, the median of "1,2,3,4,5" is "3". This seems reasonable. But on second thought, "3" really isn't a typical number in that list. Those numbers are all over the map, and 3 is very different than 5 or 1 or 2 or 4. Imagine if those numbers represented wheels on a vehicle, or children's ages, or hundreds of thousands of dollars. The difference between $200,000 and $300,000 is huge, but saying the median price for an area is $300,000 makes it seem like somehow this difference isn't very important.

So be careful with the idea that the median is "typical". It isn't always typical.

Next, note that the median of "2,3,3,9,9" is still "3". Wow, the market is exploding but the median is flat.

Whereas, the median of "1,1,4,4,4" is "4". The median went up, but themarket is crashing.

So don't get too caught up in this kind of news, other than to get a general idea of what might be going on. These number games are tricky and most people aren't very good at them, but that's one reason why we can do what we do. Affinity's analysis and rating systems get at the core of what makes real estate valuable, and those features are visible only to people who take the time to look closely at each property, neighborhood, and metro area, like we do.


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