By Greg Perry
One of my greatest sources of entertainment is to ask another real estate agent, or to overhear agents talk about the market. Some agents are "glass 1/2 full" people and will always portray a positive spin, while others can't wait for the bottom to drop to fulfill a 10 year prophesy that "this market can't last, the bottom is just around the corner." I think the truth mostly lies in the agent's personal experience at the time. If they haven't sold anything for awhile, the market is slow, if they've had a couple recent sales, it's hot.
We tend to want to categorize markets into Buyer's markets or Seller's markets. I actually believe we have 3 markets: Buyers, Sellers and Balanced. If we have more inventory than Buyers, the Buyer has an advantage in negotiation. If we have more Buyers than available houses, then the Seller has the negotiating advantage. A balanced market has no advantage for Buyer or Seller.
I also believe that most agents don't have a clue as to what is really happening in the market and their perspective is emotionally driven based on their current experience. If asked how the market is doing, perhaps the correct response is "that depends!" So, what does it depend on, you might be wondering? Here are some ideas:
- The specific neighborhood.
- The specific price point.
- The specific house style.
- The available inventory in these specific areas.
- The absorption rate of available inventory.
At 425realty.com, our focus is on Eastside real estate. And yes, we can chart general trends in the Eastside real estate market when we separate the Eastside numbers from the MLS. But what does that mean to a builder in downtown Kirkland who is currently facing over 60 weeks of inventory in his price range? Or a house on acreage in Woodinville that's been on the market for 4 months? While it may be true that properties within 5 miles of the Microsoft campus may be selling with multiple offers. Does that mean that the Eastside market is a Buyer's market or Seller's market?
Again, it depends.
When a Seller wants to know how much their house is worth to the market, typically they'll ask a real estate agent to do a Comparative Market Analysis (CMA). We are trained to look at the comparable houses that have SOLD (closed properties), the PENDINGS (properties under contract waiting to close), EXPIRED (properties that did not sell) and ACTIVES (all properties currently on the market). Total market time is also considered, however, many times this data is woefully corrupt due to listing agents that try to cheat the system by manipulating market time. We all pretty much compile the same data in our CMA's and give it to Mr. and Mrs. Seller in a colorful presentation and do our best to convince them that we're an expert in pricing.
THE MISSING INFORMATION
The key information that is missing is the rate of absorption of the properties within the specific neighborhood, specific price point and the specific house style. We can calculate the absorption rate by dividing the PENDING sales into the ACTIVE inventory to determine how many months of inventory there are. From there, an actual sales ratio number can be determined.
Here's how it works:
Example A: If you have 100 houses for sale (ACTIVES) in a specific area, and 10 homes were sold (PENDINGS) in a month, it would take 10 months to completely sell through that inventory, so we would have 10 months of standing inventory on the market.
Example B: If 50 houses out of the 100 were sold in a month's time, we would have 2 months of standing inventory.
Example C: If 80 houses out of the 100 were sold in a month's time, we would have 1.25 months of standing inventory.
We can then create a sales ratio by dividing the ACTIVE inventory into the PENDING sales. For example A, the sales ratio is 10. The ratio for example B is 50, and the sales ratio for example C is 80.
Now we can tell exactly what kind of market we have.
0-19 = Buyer's Market. 20-45 = Balanced Market. 46-100 = Seller's Market.
The lower the ratio, the better the advantage is for the Buyer. The larger the ratio, the better the advantage is for the Seller.
ACTIVE Inventory equal SUPPLY. PENDINGS equal DEMAND. SOLDS are HISTORICAL DATA.
But wait....there are more important factors to consider!
A common mistake that agents use in presenting market information is that they group all house styles together. This is an error for two reasons: First, costs of initial construction vary between house styles. A rambler, 1 story house is more costly to build per square foot than a split entry house. A split entry house has basement square footage and a smaller footprint in which it's square footage is stacked, so foundation, roof costs and plumbing costs are less. Basement square footage has less value than above ground finished square footage. Second, different house styles hold different physical and emotional values to a Buyer. For instance rambler, 1 story homes appeal to Buyers with disabilities (physical), the elderly who don't want to climb stairs (physical) and to Buyers who see themselves living in that "sunny rambler" we see so much in marketing (emotional). If our Seller owns a rambler 1 story house, and we see that in their area there have been 6 recent and quick rambler sales and there is currently no ACTIVE inventory on the market, we can quickly calculate that for rambler style homes there are zero months of standing inventory with a 100% sell through ratio. How does this factor in how the Seller positions himself in the market? Regardless of what is out there in other house styles, I would recommend a position with a very aggressive list price! I know with all certainty that the Seller will get top dollar for that rambler with a very quick market time. When too much value is given to the historical data (SOLDS) and the house style is not factored, the house may not be positioned in the market to yield top dollar.
Conclusion:
We love to chatter about MLS stats, market trends and talk of "bubbles". Trends are important to follow. However, in addition to a customary CMA, when it comes down to understanding the market and pricing a house for the market, we need to drill the information down to the specific neighborhood, specific price range, and the specific house style. When we know and understand the absorption rates and sales ratios, we can assist the Seller better to position his house to the real estate market. When agents track the absorption rates and sales rations on a weekly basis, they can truly be considered market experts.
