Data Can Lie
June 10th 2015
Sometimes we rely on data that just does not paint the correct picture.
Housing Data: so many rely on the “Days on Market” statistic and “Sold Data Indices” even though they often misrepresent what is truly going on in the marketplace today.
The average days on market for the current active inventory in all of Orange County is 79 days. For homes below $250,000 it is 80 days, over 11 weeks. Who in their right mind would sit down with a potential seller today and set an expectation of selling in 11 weeks for homes priced below $250,000? Clearly, any sound strategy to market a home will not include Average Days on Market.
The true expected Market Time for Orange County as a whole is 62 days. For homes priced below $250,000 it is 48 days. That is more like it. Sitting down with that same seller and outlining expectations between a sign in the ground to entering escrow of less than 7 weeks is a market reality. So, what’s with the huge disparity between the Market Time and Average Days on Market?
First, let’s take a closer look at how we arrive at Market Time. Market time answers how many months it will take to exhaust the current supply of active, listed homes based upon demand, the past month’s pending activity. For example, Gotham City has 100 homes currently on the market and 25 were placed into escrow within the prior 30 days. To ascertain the market time, divide 100 by 25, which is 4. So, given the most recent activity, the market time for Gotham City is 4 months.
The market can and will change and so will the Market Time; but, it is a pretty precise barometer for what everybody is experiencing in the real estate trenches today. This chart is like taking a pulse of the market. If there were suddenly a flood of listings and demand remained the same, the Market Time would increase. When demand increases, Market Time drops. However, Average Days on Market does not move as quickly and cannot accurately identify market changes and new trends.
For homes priced above $1 million, the Expected Market Time tells a completely different story compared to the Average Days on Market. The higher the price range, the larger the discrepancy. Often, luxury sellers read how the housing market is hot and mistakenly expect their home to fly off the market too. They may be encouraged by the Average Days on Market, but that is far from a market reality. For example, homes priced between $2 million and $4 million have an expected market time of nearly 7 months, not even close to the average days on market of only 85 days.
The argument against emphasizing pending sales is that many homes fall out of escrow. It happens, but not an alarming rate. Even though some pending sales do not go together, the Expected Market Time is extremely accurate and a powerful gauge of the current market. Yet, sold data is not a reliable gauge of demand TODAY. Sold data is tracked by most widely publicized housing indices, but it tells us a story of what happened about 45 to 60 days back. The market does not adhere to following what happened in the past. Instead, it does whatever it pleases today. Using pending sales over the prior month tells us what buyers are willing to do right now.
As the market slows a bit during the summer months, pending sales are going to drop slightly and the inventory will climb. As a result, the Expected Market Time will climb throughout the summer, slowing any appreciation considerably. Relying on this data is like looking out the windshield of your car, the best way to determine where you are headed. Yet, during the summer months Sold Data Indices will be elevated and indicate rising values; but, remember, this data will be a reflection of late spring, a completely different market compared to the summer. Relying on this data is like driving a car while looking out the rearview mirror.
Days on Market and Sold Data Indices often does not paint an accurate picture of what is truly going on in the housing market right NOW. Alternatively, the Expected Market Time encompasses the twists and turns as real estate evolves from season to season or responds to changes in the economy, interest rate changes, or local and global events.
Active Inventory: The inventory increased by 3% in the past two weeks.
The active inventory increased by 172 homes in the past two weeks and now totals 6,276, a 3% gain. Since the end of March, the inventory has continued to increase without pause. It looks like that trend will continue through the end of summer. The expected market time is on the rise and is currently at 62 days.
Last year the inventory totaled 7,182 homes, 906 more than today, with an expected market time of 2.64 months, or 79 days.
Demand: Demand dropped slightly in the last couple of weeks.
Demand, the number of new pending sales over the prior month, decreased by only 18 homes in the past two weeks and now totals 3,034 homes. The market is still extremely hot for home priced below $750,000, which represents 48% of the inventory but 71% of demand. From here we can expect demand to remain elevated through the end of June and then drop in July as the distractions of summer kick in.
Last year at this time there were 311 fewer pending sales, totaling 2,723, and the expected market time was at 79 days compared to 62 days today.
Distressed Breakdown: The distressed inventory increased by 9 homes in the past two weeks.
The distressed inventory, foreclosures and short sales combined, increased by 9 homes, or 5%, in the last two weeks and now totals 191. Year over year, there are 25% fewer distressed homes today. In May, 3% of all closed sales were short sales, 1.4% were foreclosures, leaving 95.6% that were good ol’ fashioned homeowners with equity. For that reason alone, the distressed inventory has been demoted to an asterisk in today’s market, almost not worth mentioning. Its impact on the overall marketplace is insignificant.
In the past two weeks, the foreclosure inventory decreased by 9 homes and now totals 54, its lowest level since January 2013. Only 1% of the inventory is a foreclosure. The expected market time for foreclosures is 38 days. The short sale inventory increased by 18 homes in the past two weeks and now totals 137, the largest increase of the year, but far below the 186 start to the year. The expected market time is 44 days. Short sales represent just 2% of the total active inventory.
Information deemed reliable but not Guaranteed. Report courtesy of Steven Thomas Reports on Housing