Let's take a look at some of the tricks statistics can play.
- Lesson 1: Median Home Prices.
- Lesson 2: Average Home Prices.
- Lesson 3: Median and Average working together
Standard Deviation relates to the term Variance, and tells us how similar the values are to the Average.
Let's look at 2 groups of numbers:
In Zip Code 1, 5 homes sold for
The Average Sales Price is $300,000 (as is the Median), and every home sold fairly close to this average price. This list of homes has a small Standard Deviation, or variance, to the Average.
In Zip Code 2, 5 homes sold for
The Average Sales Price for these homes is also $300,000, but there is a much wider distribution in the individual Sales Prices. This list of homes has a larger Standard Deviation, or variance, to the Average.
But there's more. Standard Deviation can actually give you a very good idea about how the values are distributed. Remember the Bell Curve from school? A couple of students got every question right, and a couple of students couldn't answer a single question, but most students got scores in the middle, near the average, right? That's the same way the distribution looks for just about everything out there – home prices, salaries earned, calories consumed, whatever – there will be a couple of extreme cases and a lot of average people. That leads to a set of Standard Deviation facts:
- 67% of all values will fall within 1 Standard Deviation of the Average/Mean (Red Area).
- 95% of all values will fall within 2 Standard Deviations of the Average (Red + Green Areas).
- 99% of all values will fall within 3 Standard Deviations of the Average (Red + Green + Blue Areas).
What does this mean for real estate prices?
If I know that the Average home price was $300,000, and the Standard Deviation was $40,000, I know that:
- 67% of all homes sold between $260,000 and $340,000
- 95% of all homes sold between $220,000 and $380,000
- 99% of all homes sold between $180,000 and $420,000
- By using subtraction, I know that 4% of all homes sold in the Blue areas (99% less 95%), 3 Standard Deviations from the Average, and I know that 2% sold in each blue area. Therefore, 2% of homes sold between $380,000 and $420,000, and 2% of homes sold between $180,000 and $220,000.
- This also means that only 0.5% of the homes sold were less than $180,000, and only 0.5% of homes sold were more than $420,000. Very useful information to know when you're researching a neighborhood, zip code, or city.
That's why, when you hear a quote about Median or Average Home Prices on MSNBC, KFNN, AZCentral.com, or the evening news, you need to ask yourself what that really means. Chances are you won't get the whole story surrounding that statistic – the numbers just don't sound as exciting with all the boring details to support them!
That's also why, whenever I do a market analysis, I try to explain what the numbers mean, rather than merely quoting some numbers for you to wonder about on your own.
I hope this helps you understand a little bit more about the term Standard Deviation, and how it can help you make sense of Average Home Prices.
Your statistical analyst Realtor,
[tags] standard deviation, average home price, real estate statistics, Fletcher Heights [/tags]