- Predictions for the fictitious “national” real estate market may have little or nothing to do with what happens in your local market.
- Real estate is all about supply and demand.
- The rise and fall of buyer interest in a local or hyperlocal market can be detected in several non-scientific ways that can give you a “feel” for what’s happening.
Last year was not a great one for the housing economists who forecast home sales.
Most, including the National Association of Realtors (NAR) and Fannie Mae, predicted that existing homes sales would end up south of a 3 percent increase over 2015. In fact, sales did a little better, rising 3.2 percent for the best sales year since 2006.
This year, experts are low-balling sales even more. Realtor.com has existing home sales rising only 1.9 percent this year, and Fannie Mae expects them to rise only 1.8 percent.
The good news is that these are predictions for the fictitious “national” real estate market and may have little or nothing to do with what happens in your local market.
It’s not unusual for a third or more of local markets to go the opposite direction of the national market trends. The primary reason you should take notice of the forecasters is to correct the expectations of your clients and customers who read the headlines and may expect the worst this year.
There’s less local data and market analysis available at the local level, though you’ll find more today from MLSs, trade groups, data providers and local media than you would a few years ago.
Anticipating in advance when sales and prices will rise and fall at the local and hyper-local levels is still more of an art than a science.
Here are six signs that sales may be softening in your local market.
They are less scientific — and less accurate — than the databases, algorithms and repeat sales indices used by economists to formulate national forecasts.
However, when two or more of these signs appear in a given month, it could be cause for alarm.
1. Chronically low local inventories
Real estate is all about supply and demand.
When there are fewer houses to sell and demand is average or better, prices rise and properties sell faster for awhile.
When prices are too low, as they were in 2007 to 2013, fewer houses coming onto the market is a good thing. The current level of demand will lower total supplies and prices will rise, encouraging more sellers to list, and boosting sales.
In today’s markets, however, demand is stronger and low inventories are forcing up price. Fewer houses to sell automatically translates into fewer sales.
Pay close attention to current active listings and new listings in your MLS. February, March and April are the months when sellers traditionally replenish depleted inventories to reach buyers over the spring and summer season.
If inventories that are falling now were also lagging last year, you are witnessing a significant decline over two years or more that will result in low sales.
Sometimes low inventories early in the year drive prices up fast. Sellers quickly become motivated, and conditions can improve by June or July in time to salvage sales for the balance of the year after some damage is done.
2. Declining pending sales
Not all markets report pending sales, which occur when a seller accepts a buyer’s offer but the house has yet to close.
Pending sales often differ from closed sales in the same month; about 15 percent of deals can fall through for a variety of reasons that may or may not reflect falling demand.
However, pending sales do give an indication of what closed sales will look like in the current month.
You can get a feel for pending sales in a hyperlocal market by keeping track of contracts within a ZIP code or a community on a monthly basis.
Remember, seasonality will affect pending sales as well as closed sales, so a simple month-to-month decline may not be cause for concern if you are entering late summer, fall or winter markets.
3. Longer hyperlocal days on market
Today’s MLS and aggregator sites make it easy to search ZIP codes, hyperlocal communities and neighborhoods by sales and pending sales.
If you subscribe to market data information from your MLS or vendors like CoreLogic or RBI, you can search by community or ZIP code to find current days on market and months of supply data.
These data vary by the season, so month-to-month comparisons may be misleading.
Get a year-over-year comparisons by looking up days on market and months of supply data from a year ago.
If houses are taking longer to sell or if the months of supply is larger than it was last year, those are signs that demand is not keeping up with supply, that sales may be weakening and that you might experience fewer sales.
4. Sale-to-list price ratios
When homes end up closing below their list prices, sellers are getting less than they hoped for.
Either they are settling for offers below their list prices or buyers are successfully negotiating lower prices, which reflects diminished seller confidence due to flagging demand.
Market reports from RBI, CoreLogic and other vendors provide sales-to-list ratios by county, city, ZIP code, community or neighborhood.
Many sellers price their homes above market price in hopes of getting a windfall or strengthening their market position when negotiating with buyers.
A list-to-price ratio of 96 percent or above, therefore, is a not a cause for concern and may be a sign that demand is strong.
However, when sales-to-list ratios fall into the low 90s or 80s and decline continues for a month or more, that’s probably an early sign that demand is waning and sales will falter when sellers resist the pressure to cut prices.
5. Buyer traffic
The rise and fall of buyer interest in a local or hyperlocal market can be detected in several non-scientific ways that can give you a “feel” for what’s happening.
In recent years, researchers at NAR have experimented with lockbox data that records home showings.
NAR also publishes a Traffic Index within its monthly Realtors Confidence Index report that gives a feel for buyer and seller traffic based on reports from Realtors participating in a monthly survey.
I’m not aware of any MLS or local lockbox data from Supra or Sentrilock, but if local market data on showings could be aggregated and released at the local level, it would be a very helpful indicator.
If you work in a large brokerage or network with other agents, you can take the temperature of local buyer traffic by keeping track of open houses and showings.
6. Price reductions (hard evidence)
Every local market has a few sellers who get a little greedy and price their homes too far above market expectations.
When they cut the price by 5 percent, they are simply facing reality.
When owners whose prices are close to market price medians start reducing prices, however, something serious is going on.
Sales usually fall before widespread price-cutting occurs.
So price-cutting itself is not an early indicator but rather a final confirmation that demand is not strong enough to maintain current price levels, and that sales will suffer until price corrections occur.
Steve Cook is editor and co-publisher of Real Estate Economy Watch. Visit him on LinkedIn and Facebook.