By Leon d’Ancona
Real estate is a true and absolute manifestation of the law of supply and demand. Homes will sell for a price that buyers perceive they should pay for it, not what sellers decide they want for it.
If you have difficulty with that concept, think about how much your home will be worth when they find just a little nuclear waste in your backyard. Even esoteric matters can influence the price of a home. A house that President Kennedy slept in will command a higher price than the one next to it.
In over two decades of providing real estate statistics to thousands of brokers and agents, a truth has emerged that I see happening over and over again. Sellers and buyers react to what they read. They fail to notice that what they read already happened and has already affected the price of their homes. Instead of reacting to market conditions, real estate consumers respond with too little, too late, if at all.
Real estate is the most documented endeavour of the free enterprise system. No other activity gives such complete details about a transaction. Not only do we know the exact price that a home sold for, detailed information is available about all aspects of the sale including the intent of
the seller when he first put the house up for sale and subsequent price changes.
Real estate agents have detailed information about every transaction with which they can advise their clients as to market trends. These precise details are the key to moving with the market rather than following the market.
Our society that advocates caveat emptor (let the buyer beware) makes purchasing a big-ticket item an adversarial process. Adversaries look at the same thing with different perspectives.
While the seller is convinced that his home is an under-priced palace, the buyer looks at the same habitation as an overpriced dwelling that will take fix-up efforts to meet his needs.
While it might be said that the buyer and seller behoove each other, it is the buyer who decides the outcome of the transaction. The buyer is the dominant decision maker in the home buying process, to which the seller must subjugate himself. This is especially true in a declining market.
Newspapers and real estate agents like to write about a “buyers market” or a “sellers market”. These terms are meant to indicate the relative negotiating strength of each of the parties in the current housing market.
Newspapers tend to report the out of the ordinary. The problem with reading about real estate trends in the newspaper is that assuming the author knows as much about real estate as you do (which in many cases is not so), he is regurgitating information read elsewhere, which is usually general, rather than specific. Any real estate agent is likely to have a better appreciation of the market than the newspaper writer trying to meet a deadline.
A key indicator that every agent recognizes is days on market – the time it took to sell a home. Even small movements in days on market are significant when taken with the right sampling. If you are tracking 500 homes sold and notice that last month it took eight days longer to sell a home, the conclusion should be obvious: 1,000 buyers (usually two per home) took an extra eight days to make up their minds. They felt less compelled to make a quick decision. The logical derivative of this slower decision-making is that these people’s perception was that the market was not as buoyant as the sellers believed.
Yet another key indicator that should act as a barometer predicting short-term housing price movement is the “sold-to-asked” ratio. Simply put, it is the ratio of the asking price versus the selling price. If the asking price was $100,000 and the property sold for $95,000, then the sold-to-asked ratio was 95 per cent. The logical progression is that a decline in these numbers along with longer days on market, results in a price decline.
The next indicator the true real estate professional uses is tracking the average price or median price of homes on a month-by-month basis, especially in the agent’s sphere of influence.
Using these three indicators makes short-term market predictability much easier. The challenge of the real estate professional is to be able to give clients a short-term pricing scenario that is realistic, while her sellers or purchasers are relying on data long since negated by the current reality of real estate. I believe that consumers, when educated properly, accept that reality. Sixty-day price predictions are easy and accurate to come by.
Leon d’Ancona B.T.L., M.T.L., RRESI, is president and founder of IMS Incorporated, and creator of REality, an online service used by franchises, brokers and agents to improve their bottom line. Author and writer, he is a regular speaker at real estate gatherings throughout the continent, and is well-known for his entertaining, illuminating presentations. Email: [email protected].