In the housing market, knowing where you are in the lifespan of a trend is both very important and slippery to capture. Most of the data you have available with which to analyze trends is backwards-looking. If you’re trying to figure out what the housing market looks like right now- at the moment you’re deciding which house to buy and how much to pay or how much to sell your house for- you have to know what the market looks like right now.
Sales data is history. That is to say, by the time we see actual cold hard facts about home prices, the decisions that led to those prices occurred at least a month ago. It generally takes a month or more to close on a purchase, and we don’t get to see what the final sale price is until that closing happens. So, if a house closes on July 1, the agreed-upon purchase price was probably set sometime in May or early June.
This becomes a problem when you’re relying on comps to determine the value of a house, whether you’re selling or buying. If you were evaluating a home in June and using May’s sales data to inform your decision, there’s a good chance you would be overvaluing the home since the median sales price dropped in June. In addition, the percent over list price that houses sold for in May also peaked and dropped in June, so if you’re using that metric to decide how much to offer on a house, you may be looking at the wrong data. Relying on comps to make your decision would have been a double whammy: you’re comparing to houses that sold at peak value, AND for a larger amount over list price than what the current market reflects.
So sales data becomes less useful in a rapidly changing market. With that being the case, what can you look at that’s a more timely reflection of the market conditions right now? There are a couple of ways I like to tackle this problem.
PENDING TRANSACTIONS
A transaction enters pending status when a seller accepts a purchase offer, and escrow begins. To get a true glimpse of real-time market activity, you can look to the pendings. The amount of listings that find a buyer each week are your first indication of what the demand in the market really is. For the past couple of months, those numbers have been down significantly from the same period last year.
The amount of pending transactions is partially a function of how many active listings there have been- after all, a house can’t go pending if it wasn’t listed in the first place- but the number of active listings this year isn’t that far off from last. For the time period above (and year-to-date), active listings are less than 5% lower than last year. Pending transactions in the period above are down 28%. Put simply, less houses are finding buyers than this time last year.
DAYS ON MARKET
The average amount of time it takes for those actively-listed houses to go pending is a pretty strong indicator of where market demand is at any point, and is not as much of a lagging indicator as sales data is. This average has been rising dramatically in recent weeks.
The familiar narrative of the past couple of years- in which a house goes active on Thursday and is gone by Sunday- is nowhere near as prevalent as it was as recently as two months ago. The houses that found buyers last week took an average of 27.7 days to do so.
There are still plenty of houses that find buyers in their first weekend on the market- 23% did last week. However, that percentage was near 40% back in May.
PRICE DROPS
I find myself talking about price drops quite a bit lately, for good reason.
While it’s dramatic enough that the number of active listings that have had to drop their price has risen substantially since May, what’s even more dramatic is that the weekly number was in the 40’s this past March. In other words, six times as many active listings in July have reduced their price compared to March.
Looked at another way- per research done by Redfin and reported by CNBC, 45.7% of sellers in June in the Portland metro had dropped their price. That’s pretty significant if you’re out there shopping for homes, knowing that if a house hasn’t dropped its price already there’s a pretty solid chance that it will.
So clearly the real-time metrics that are available to us point to decreased buyer demand- resulting in fewer transactions, more price reductions, and ultimately lower sale prices- but how does that actually help us properly evaluate the market right this moment? This is the part where art meets science. We can use what sales data we have- we know that the median sales price in June was down 3% from May, and that the gap between list and sales price has narrowed considerably. We add in the trends we see above, particularly their trajectories. Throw in healthy pinches of anecdotal evidence, which we see every time we host a poorly-attended open house, or see a house not get any offers when it would have had several as recently as a few months ago. Then there’s human behavior, which isn’t always rational. Are buyers worried about more rate hikes down the road? A recession coming? Are sellers panicking, because their house isn’t getting offers while their neighbor’s house sold easily a few months ago?
All of that is what goes into the stew when making pricing decisions, whether you’re buying or selling. When a market shifts as rapidly as it has recently, it’s crucial to look at every bit of evidence that’s available, and not just waiting until the end of the month and looking backwards.
