All Real Estate Is Local

by Bernice Ross, Ph.D. MCC
Owner, Teleclass4U.com, LLC and RealEstateCoach.com

Copyright © 2008
RealEstateCoach.com and Teleclass4U.com
All rights reserved in all media.

More bad news from the Standard and Poor's Case-Shiller Index: prices were down overall by 15.8 percent for May. How meaningful are the national numbers to your business?

At Real Estate Connect, I had the pleasure of moderating four different foreclosure panels. The last panel had a spirited discussion about the foreclosure numbers and what they mean. When I asked Lauren Guzak, Director of Strategic Relations for Dataquick, about the discrepancies in the numbers and whom we should believe, her emphatic answer was “No one!” This may be an odd response for someone who is in the business of selling market data. The point that Guzak was making, however, is that the national numbers and even the state numbers are essentially meaningless when it comes to your local market. The question is what numbers should you be tracking for your business?

HappyReNews.com

This site is completely biased—they only report on those cities that are having an increase in some aspect of their market statistics. Their approach is granular—in other words, they're drilling down into what is happening in specific towns and even in specific neighborhoods. While the national headlines trumpet price declines, there are several other factors to consider when evaluating your local market conditions.

Too big to be meaningful for local markets

The Case-Shiller index has a complicated statistical formula that they use to report on whether prices have declined or increased. Even if you are in one of the 20 MSAs (Metropolitan Statistical Areas) they cover, the size of the area is so large that the data is not useful for a specific price range in a specific neighborhood. The same is true for other national numbers such as those reported by NAR and OFHEO.

Pricing data lags behind other key predictors

In the fall of 2004, I wrote three columns on what would happen in the next buyer's market. What gave me pause for concern was the decrease or disappearance of multiple offers, the increase in the number days on market, and increasing rates of absorption. While properties located in prime areas continued to experience strong sales and increasing prices, the other three variables indicated the beginning of a market slowdown. When the market shifts from a seller's market to a buyer's market, there is always a transition period where there is stability. Prices stop increasing or decreasing and then stabilize. As I look at the national numbers that report price deflation in many areas, other indicators may be the first signs that the downward spiral is beginning to move towards stability.

Here are the cities that Case-Shiller reports as having price declines that HappyRENews reports that have an increase in at least one other indicator.

1. Cities with increases in unit sales

Charlotte, NC (.05%); Miami (12.1%); Los Angeles (4.8%); Phoenix (16.5 percent); Portland, OR (15.4%), San Diego, (39.2%); San Francisco (12.7%); Seattle (10.1%).

Unit sales are important because they indicate how quickly the inventory is being absorbed. Michi Olson, Vice President of Business Develop and Relocation for Alain Pinel Realtors, told me that banks are now asking for absorption numbers when they sell REOs. In other words, they want to know how many months of inventory are on the market and how quickly the existing inventory will be sold. As a rule of thumb, if there are six months or less of inventory, you are in a seller's market with price appreciation. If there are seven or eight months of inventory, you are in a flat or transitioning market with price stability. If there are nine or more months of inventory, you are in a buyer's market with downward pressure on prices. When unit sales increase, the inventory decreases. This is can be one of the first signs that a market has reached the bottom or is beginning to stabilize.

2. Cities with declines in the number of days on the market

(Atlanta (-2.3%), Charlotte, NC (-7.5%); Dallas (-15.5%); Miami (-14.1%); Los Angeles (-24.4%); Phoenix (-7.2%); Portland, OR (-8.6%); San Diego (-3.4%), San Francisco (-6.2%); Seattle (-13.6%)

Days on market (DOM) is another good barometer for determining if the market is improving or getting worse. A decline in DOM indicates that the market is getting better. As you can see from the numbers above, a number of cities are also experiencing a decline in DOM indicating that these markets may be improving, even though prices may still be declining.

So whose numbers should you believe? National numbers are meaningless to individual sellers and buyers. Instead, track your local rate of absorption, days on market, and the number of unit sales. All that really matters is what is happening in the neighborhood where your clients are selling or purchasing.