To know if the market is getting better or worse, we have to expect something of the market. That is the only way to know if the market is doing better or worse “than expected”. Active markets anticipate. If a company’s earnings are down to the same degree as anticipated and expected, there will be no change in prices. So we have to expect something to happen, and this post is all about what I expect to happen in the King County – Seattle Area Real Estate Market.
To keep saying the market is down from peak for 3-5 years is both boring and of no value, and only fun ad nauseum for whiners. I call that NSS (No Sh_t Sherlock) meaning no kidding the market is down from peak; that news is a year old now. What’s next?
To those who hate it when an agent sticks their neck out and makes predictions, I say…go away then or get used to it or get over it. Agents are paid good money to answer the question “Where is the real estate market going?” If we only got paid to open doors and say “do you like this house”, we’d be paid $15 an hour. That’s the going rate for a good real estate assistant.
Sellers need to know if selling next year is better than selling this year. Sellers need to know when they get an offer today, if that offer is or isn’t likely the best offer they are going to see in their timeframe. Buyers need to know if they can sell in 1-3 years without taking a loss. People need agents to have an opinion about the future, both the near term future and the foreseeable future, They can’t simply rely on personal experience and say “well I’ve never seen that happen” because the future is not about the recent past.
The graphs below show what I expect the market to do as to volume, which will assist us in determining true Absorption Rate and knowing whether the market is getting better or worse (than expected).
I’m calling Absorption Rate as of now, 10 months. Current inventory is 12,403 and I expect it to take 10 months from today for 12,403 Residential properties to sell in King County. That also means it will be a Buyer’s Market until and unless we see inventory drop from 12,403 to 7,500. That can happen by property selling, or sellers deciding to rent or withdraw from the marketplace, at a higher rate than properties are coming on market. I expect that to start happening on September 1 and continue through year end. Whether or not prices will continue to decrease into next year and beyond will depend on how close we can get to 7,500 properties on market by December 31st.
The two graphs below are a double check system. On a month to month basis we would expect to see variance. Sometimes August sales are higher than September, and sometimes September sales are higher than August. So the double check is for the Quarterly sales stats to fall into the prescribed ranges within a reasonable variance.
I took the year notations off the monthly stats, as I don’t expect these numbers to change unless there are changes in the mortgage market that create additional buyers. That could be lower interest rates and.or looser lending standards. Until then, we have to learn to live with what we can most likely expect to happen.
Couldn’t work the link to this cool Seattle Bubble graph post into the post itself, so I’m linking it HERE.
When you check out the graph on comment 1, we look like such “pups” compared to what other cities have gone through with depreciation.
I’m hopeful that even though we started later, we we’re not necessarily going to have all the damage other places are–that as others pick up, we’ll still be going down a little or leveling out and bouncing on a bottom. Simply my hopes.
I did notice at a neighborhood open house this weekend, it was BUSY. A few weeks ago, when this property was held open, I think just 3-5 nosy neighbors came through. Not a total indication of the market or anything of the sorts, but I am hearing from more people in the industry that things “seem” to be picking up a little bit.
Ardell, do you think it’s realistic for any buyer to sell in 1-3 years? My assumption would be that if someone is planning on selling 3 years or sooner, they should consider renting.
I hate to ask a dumb question…but does the bar graph represent total predicted sales volume, and the pie chart the same, only by month, instead of quarter?
I looked at the Seattle Bubble Graph, and yes, I would have to agree that the better means of measuring or predicting the future change in home values should be from July 2007, when the credit markets REALLY understood how far down Shit Creek they had gone with no paddle.
I take it you are not predicting a number for median KC home price one year from now. Maybe it doesn’t really matter, since the individual price change will vary so much by location and other factors.
Based on my recent reading, analysts are predicting tighter credit standards in 2009, and higher rates for 30 yr fixed. Doesn’t mean it will play out that way, but I’m not seeing any current evidence to the contrary.
“Ardell, do you think it’s realistic for any buyer to sell in 1-3 years? My assumption would be that if someone is planning on selling 3 years or sooner, they should consider renting.”
It’s certainly done all the time. I’ve done it several times myself. About 35% the people I speak with fall into that category, so yes, I’d have to say it’s realistic for people to ask the question and sometimes do it.
In 2004 and 2005 it was very realistic, and many did it and walked off with a tax free gain after living there for two years, instead of renting. Tax free income and a write off vs. renting.
Is it a realistic expectation in today’s market? No. But that’s why we “predict” the market into the future. Some days the answer is yes and some days the answer is no. Today…the answer is mostly no, unless you are buying a fixer and can do a lot of the work yourself AND you are buying it to live in it vs. renting and not for an investment. Lots of ifs and or buts in there.
Rhonda, we both know many people who moved in 1-3 years, who didn’t know they were going to do that at time of purchase. So it’s a valid question for an agent to answer, even if the buyer doesn’t ask it.
Timing is everything. Previous years, owning for 3 years, in addition to the tax benefits, you would have appreciation….now short term ownership (3 or less years) is a gamble (in general).
True too that many people make the best plans only to have life happen.
Roger #3
They are both King County Residential. I don’t use condos for forecasting, as too many sell outside of the mls.
You can’t predict price until you can determine volume. January 2008 sales volume wasn’t within a stable range. I didn’t start seeing any stability as to volume until I wrote my first prediction post back in April. May, June and July remained within a stable range, so I think volume is predictable.
Price will depend on what happens with Active Listings between now and year end. Oddly the bigger story about prices has a hidden factor…the concessions after price is agreed upon with regard to credits and repairs. If you are seeing prices down by 7%, that is often more like 9% to 12% after in escrow concessions to get it to close.
Roger #4,
I’ve already factored that in and I don’t expect futher tightening of lending criteria or rates increasing within 1 basis point to affect these predictions.
Both Fannie and Freddie are hiking up their fees (Fannie in Oct and Freddie in Nov) with an adverse market fee to 50bps…FHA will continue to gain popularity not only with underwriting guidelines as compared to conventional, but they may wind up w/the best rates in town! As long as we have FHA, #4 may not be such an issue.
Rhonda,
But what made me say yes to two people with a two year hold plan in 2004, and no to many in the last 18 months? It’s not the luck of the draw, and agents need to have different answers at different times and different different answers for different people.
Some people really can’t rent. There’s no one answer for everyone.
That’s very true. Jillayne had asked me on another post what my advice was to clients and I couldn’t answer. Everyone has a different, personal situation.
The sad reality is that many people purchased in the last few years that couldn’t get approved for a rental, or didn’t have the up front monies needed to secure a rental, but could buy.
I want to stay in denial for another five minutes and pretend I didn’t just read that, Ardell.
If that’s true…..Oh my.
So next question becomes, what happens if those same folks end up foreclosed? Where do they rent?
“I want to stay in denial for another five minutes and pretend I didn’t just read that, Ardell. If that’s true…..Oh my.”
Of course it’s true, Jillayne. I can’t believe you didn’t know that. I thought it was common knowledge.
Cash needed to purchase equalled zero. Cash needed to rent equalled 1st month plus last month plus security deposit and pet deposit and if you had 5 kids…good luck.
Credit score needed to rent was higher than credit score needed to buy.
Pets? Many can’t rent a house with 2 or 3 big dogs, but can buy a house with no questions asked about pets.
No money + 580 credit score + 5 kids and three dogs equalled buying vs. renting.
Ardell wrote: “Agents are paid good money to answer the question “Where is the real estate market going?
Kary,
Did you know that the current median price for all pending sales is $409,000 and that is ASKING price before actual price is revealed?
Add that to current closed median of $439,000 and where are you?
By making reasonable assumptions based on years of stats, you can forecast where caution is advisable.
Maybe 1st Quarter 09 will be 3,200 and the 2nd Quarter will be 4,000. That’s still better than constantly going back to peak month after month. Or saying volume is dramatically down in January when it is ALWAYS dramatically down in January.
We are the keeper of the data. People don’t have access to all of the information that we do. If we do not use that data to assist people in forecasting, then we should give them the data so they at least have a fighting chance to try it themselves.
You can’t hoard the data and then only release what may be self serving. Predictions and forecasting are necessary compenents to ALL markets. That doesn’t mean in any field that the stock market is entirely predictable or the bond market is entirely predictable or the real estate market is entirely predictable.
I’m 99% sure that my numbers will prove out in the long run. Let’s see where volume and medain price are on December 31, 2008.
It’s like a jelly bean jar, Kary. If you get close enough to the total, you win. If you get the exact number, you likely cheated.
Reality Kary is that the some of lowest prices aren’t closing, which is making the median look higher on the closed side and lower on the pending side. They are not all short sales either, just financing issues on the lowest common denominator. That will shake itself out and down. It’s just taking a little longer than expected.
That’s why you make predictions. To see how the market is performing relative to. With pendings at $409,000, and 2nd quarter sales that failed to close at $397,000, it’s not too hard to find why the median is looking artificially high…if you’re looking.
Here’s another one for you, Kary. 538 of the current pending sales were pending in the second quarter with median prices of $409,450.
Hi Ardell,
Question: Where were these families living before they decided to buy?
I’m assuming…they were renting?
Am I missing something obvious? Thanks.
Ardell wrote: “We are the keeper of the data. People don’t have access to all of the information that we do. If we do not use that data to assist people in forecasting, then we should give them the data so they at least have a fighting chance to try it themselves.”
Past performance doesn’t have a heck of a lot to do with future results. If I gave you the data for 1989 through 2006 you’d think our median would be over $500,000 by now.
You can use the data to tell where we were and where we are, not to tell where we’re going.
We’ve been pondering what those pendings mean for a month or two now, and I’m not sure we really know yet. They clearly aren’t run of the mill transactions.
“You can use the data to tell where we were and where we are, not to tell where we’re going.”
You can choose not to…just don’ t choose for everyone else please. We estimate often in this business. We err on the side of caution and in the clients favor. We don’t say “beats me! I haven’t a clue!” And I’m positive MANY, MANY agents have lots to say when the info points in the direction of self interest. Not fair to clam up when the tide turns.
Kary,
It’s easy to look at them. Lots are short sales that will come back as foreclosures. Likely most of them. I don’t have an exact count, but 8 or 9 out of 10 of the ones I studied were short sales. A couple were subject to short platting or other factors. On the recent count I eliminated those that are Pending Subject to Feasibility, so most of the remaining ones were short sales.
Even if half or 3/4s end up as closed short sales or REO transactions, that’s enough to account for most of the falsely elevated median price.
I didn’t clam up when the tide turned–I never made predictions. If anyone ever asked I gave them the correct answer: “No one knows.”
I use data for more useful purposes. For example over in P-I land, in one of the discussions regarding a news article, the topic of median prices to median earnings came up. That’s an invention of the NAR that ironically has been clasped onto by some bubble bloggers, and is totally irrelevant. First, median income includes a lot of people that never in their live will own real estate (as well as people that are not yet at the stage where they would). But beyond that, people paying over the median often put substantial sums of money down. People outside the industry don’t realize that, so giving them some data on that is useful.
Jillayne,
They were renting. Many had to move because the owner was selling or coming home or some other reason, and they didn’t have the up front monies or strong enough credit to get a different rental.
Remember a bank can take 10% of their loans at 580 scores (back then), but an owner has no diversification advantage. An owner with one place to rent can’t afford to take low credit score risks most times. All their eggs are in one basket.
One of the only ways to get a rental with a lower credit score is to pay a few or several months rent in advance. So buying became the only choice to put a roof over their head.
What happens next may not be worse than what would have happened back then if they couldn’t buy.
Ardell wrote: “Even if half or 3/4s end up as closed short sales or REO transactions, that’s enough to account for most of the falsely elevated median price.”
The median price reported is not “falsely elevated” simply because it doesn’t match your prior prediction. 😉
Any idea what percentage of properties that go to foreclosure are not being bought by a third party? A year or two ago I think it was fairly low, but now it’s probably much higher. Anyway, only those bought by a bank will come back (at least in their current condition).
And on a related topic, I wonder how many actives in addition to those pendings will end up in foreclosure as a result of the distressed property law. Unfortunately I don’t think agents have a good handle on distressed property and to some extent they are throwing out too many properties, but then there are also other agents who are totally ignoring it. It’s definitely a case of really poor timing by the legislature, because the market really doesn’t need additional foreclosures right now. But that alone is a good reason why you can’t predict prices–I don’t think anyone at this time has a good feel for just how that is affecting the market, and that’s only one factor of many.
Well when you do that over on the PI Blog, I promise I won’t come over there and tell you why you are wrong. It really is quite rude for you to consistently come over here and tell me that I can’t do what I’m doing. It’s fine to say you wouldn’t or couldn’t do it, Kary. But it is more than rude for you to constantly come over here and chastise me for doing what I do.
I don’t know an agent in this business who has never heard an agent tell a buyer that real estate values go up. If you are telling me that you have never, ever told anyone that real estate values go up, are you also saying that you haven’t heard other agents say it?
I would never, ever expect my predictions to be exact matches, Kary. Nor would anyone who is forecasting on any economic basis.
I probably have heard other agents say it, at least around other agents. Around clients doesn’t come to mind.
Rude? I’ve invited you over there. I don’t care if you disagree with me there. But go back and look at what started this discussion. I was responding to your claim that agents were paid all the time to make predictions. I stated that if that was the case, the clients were fools. Why would anyone pay for something as worthless as an agent’s prediction of where the market was headed? Agents get paid to determine the current value, negotiate price and handle paperwork and other such matters.
Now maybe commercial would be different, where predictions of rent levels would be important. But even there I don’t think you’d look at the predictions of an agent.
Ardell wrote: “I would never, ever expect my predictions to be exact matches, Kary. Nor would anyone who is forecasting on any economic basis.”
For 2nd quarter 2008 you didn’t even get the direction right!
Kary,
I’m always going to err in the consumer’s favor. If I think upside potential is 10%, I might say 8%. If I think the downside is 12%, I might say 15%. For 35 years I have always padded to the client’s favor. That’s how I was taught to do things.
I have never been in a business where “I haven’t a clue” has been an acceptable response.
When you were a practicing attorney, didn’t you have to predict what the judge might rule or the jury might decide? I can’t believe you have gotten to the age that you are without having to make reasonable assumptions in order to advise clients. I’m sure that is not the case, at least not in your previous field. Maybe you were better able to do it in your lifelong profession than you are now, but I’m sure you’ve had to do it at sometime in your career.
The direction is right, Kary. You can stand there and say prices are up…but I don’t think anyone’s going to believe you. I’m certainly not.
From your prior piece (which I linked above):
“first quarter of 2008 – $435,000 (same as 3rd quarter of 2006)
. . ..
My price predictions are:
$429,000 for the 2nd quarter of 2008”
$429,000 (your prediction) is DOWN from $435,000.
$440,000+ (the actual number) is UP from $435,000.
There’s really no believing involved in this. It’s fact.
Interesting conversation. From the point of view of a non-agent, hoping-to-buy-soon dad, a couple of things seem clear to me. Real prices have decreased steadily since mid-2007. There are a multitude of properties have dropped prices $50K, $75K, or even more and have not sold. Those properties I’ve seen sell quickly are priced well below where they would have been 3, 6, or 9 months ago. Even properties in select areas. Case Schiller did show a slight pricing bump in the spring that quickly came back down the next month, but it’s doubtful that real prices went up for the 2nd quarter. Actually, to interpret median data in that way is just as speculative as making a prediction.
I think it’s time that everyone acknowledge that median prices represent only a statistical mid-point and are an inherently limited measure of pricing. For goodness sakes, people in lower income brackets aren’t worried about buying a house these days. They’re worried about paying utility bills, filling gas tanks, and keeping their children fed. It’s that bad out there. The very nature of the median changes when consumers are struggling.
As for predictive advice from an agent, I can’t help but hear the multitude of voices of agents who told me that getting involved in multiple offer, well-over asking price situations was safe. Their prediction was always the same: “Don’t be afraid of over-paying now because in a year, you’re be sure to make it back in equity.” I feel sorry for the family who listened to that predictive advice in 2007. (Ardell, I know that’s not the kind of predictive advice your talking about.)
Last week, I asked an agent who we’ve known for many years about how much prices have declined. She offered no specifics and said that she doesn’t pay attention to data. I was dumbfounded. She’s a dearheart and we trust her unconditionally. But there is no way, in this market, that she gets our business. The future has everything to do with our purchase strategy.
DadTimesTwo wrote: “Interesting conversation. From the point of view of a non-agent, hoping-to-buy-soon dad, a couple of things seem clear to me. Real prices have decreased steadily since mid-2007. There are a multitude of properties have dropped prices $50K, $75K, or even more and have not sold.”
Lots of good points in your post, but I’ll start with these which aren’t so good.
Prices have not decreased steadily since mid-2007. The low on the median for 2008 was $429,900 in February and the high 449,700 in June. The low for the mean was 525,948 in January and the high 558,380 also in June. Now part of that is seasonal, but in another thread when I posted all the medians since January, 2007 a rather astute reader (who happens to think prices will decline further) initially thought my numbers weren’t King County NWMLS numbers because they didn’t seem to match the impression he was given in press reports!
The second, and I think you realize this, is you cannot use price decreases on active properties as evidence that prices are declining. It simply means the house was overpriced. Price decreases happen even in very strong markets.
To some extent I agree with you regarding the limitations of mean, median (and SF used by Ardell). But it’s what we have. And to me at least, the problem isn’t anywhere near as great as the problem with using too large of an area. King County is too large of an area! Even the NWMLS areas are usually too large of an area. But the King County numbers are usually what people look at, even though they mean little to most people. And Case Shiller uses an even larger area, making its number even less meaningful to most people (although that number is probably more meaningful to people in outlying areas).
As to the agent you mention, that is shocking. While I don’t believe agents should make predictions, they should at least try to know what is currently happening, and what has recently happened. That said, an agent could go into an area they are completely unfamiliar with and do the analysis from scratch. I did that earlier this year in Kitsap county with excellent results.
DadX2, here are the numbers for the area I use for my farm area statistics, which is the area surrounding Fairwood Greens in Renton. I use 4 month periods because the numbers bounce around too much from month to month. These numbers are for 4/1/08 to 7/31/08.
————2008—–2007
Mean——-389,616—397,118
Median——375,000—374,975
$/SF———192.55—–192.87
Ave SF———2137——2126
Age range—-69 to 84—-66 to 90
If I remove the house built after 1983 from the 2007 numbers are:
————2008—–2007
Mean——-389,616—390,742
Median——375,000—373,475
$/SF———192.55—–199.96
Ave SF———2137——21119
Age range—-69 to 84—-66 to 83
This second comparison is thus of very similar houses in a neighborhood which is very uniform. And it shows no significant change in prices. And in case you’re wondering, the number of sales in 2008 was 25, while the 2007 was 28 or 26, depending on whether you remove the newer houses. The only significant difference is “Days on Market” where for 2008 it was an average of 97, while in 2007 it was 57.
I think this demonstrates well the reason why King County numbers (and Case Shiller numbers) don’t mean much the the individual person. They indicate the overall health of the market, but not whether an individual’s asset base has increased or decreased.
Two mistakes above. Both period were from 4/1/ to 7/31 (I should have left the 08 off when describing the period) and I should have said “houses build after 1983” since there were two of them.
Kary wrote:
“Ave SF———2137——21119”
Is the range really that wide?
Okay, three errors. 😉
2137 and 2119.
I went and double-checked all the numbers, and I also had a typo on the $/SF for the second group. The last number should be 190.96, not 199.96.
The point is, all the numbers are rather similar, except DOM which is up significantly.
I was thinking of doing an area that is down more than average, but given the number of mistakes I made in the first post I think I’ll pass on that. 😀
“Price decreases happen even in strong markets” – K Krismer
Really?
I suppose one would have to define what a strong market is. In my mind, if one is implying that actively listed price reductions (if that is what is meant by “price declines”) happened during the “strong market” during 2004, 2005, 2006 and into the early months of 2007, that is absurd. Price declines were virtually non-existent.
“If a company’s earnings are down to the same degree as anticipated and expected, there will be no change in prices.
Kary,
I am curious as to how you think an agent should deal with a Bellevue home-owner who asks if they should sell their house now, or wait a couple of years (assuming they are in no rush to sell, but know they eventually want to move to Los Angeles in 3 or 4 years)?
Should the agent just say it is impossible to tell whether it would be better to sell right now or in 2011?
Sniglet-
Yes, It is impossible without more information.
Q-diddy wrote: “It is impossible without more information.”
What information would be useful for making such a prediction (other than a time-machine)?
I think Ardell and Kary are both right. The Realtor has a responsibility to furnish the best information available, but also has a responsibility to convey the level of confidence in the information. The latter is the part that most often doesn’t get done well. People who are proud of their work don’t want to admit that they still are rather uncertain. And the clients frequently don’t want to hear that part, either.
DadTimesTwo, et al,
While price reductions is somewhat of a barometer, a better one for my money, and my client’s money, is Expired Listings. At present they are running at 4.4 times what they were in 2005 for the same period.
In a weak market, agents “work expireds” and it is often better to be 2nd in or even 3rd in when it is a buyer’s market. In a strong market there are virtually no expireds to work, as the ones that don’t sell are usually such dogs that no agents want them.
If there were any question regarding this market (Kary) then maybe the below statistics are more telling:
# of Expired Listings 1/1 through 8/13
2008 – 5,093
2007 – 2,857
2006 – 1,670
2005 – 1,149
2004 – 2,369
2003 – 2,510
2002 – 2,160
2001 – 1,832
“It is a little more complicated.”
Michael,
Everything is a little more complicated than you can address in a blog post 🙂 Point is that markets and people in them DO anticipate.
Even back in 2004 when short term future projections were good, one had to determine if the current owner already anticipated and captured future value (I call it “sucked out the future equity) for 2 to 3 years forward.
If someone bought a flip property in 2005, they often paid top dollar for cosmetic improvements, so there was no hope to sell it for more than they paid on a short hold period. That was not a good selection for a buyer looking to stay short term, even in a year where many homes, if not most homes, had good potential for a 1-3 year hold period.
So the answer was yes, you can hang on to a house for two years and trade it out with no capital gains after taking two years of deductions vs. renting…but not THIS house. The current owner already anticipated and captured future value on this one.
Ardell:
That is a startling number!
I do like part of Kary’s argument, regarding drilling down to a managable and meaningful subset, at the neighborhood level. Most of us only own one home, anyways, and most buyers are only looking to buy one home.
Some areas will do better in holding value in the coming years than others, and of course, where you choose to live should not be just a function of how much you think it will be worth in 5 years, but how much you will enjoy living there.
Drilling down to the particulars is certainly a value added proposition that a good RE will bring to the table.
Tim wrote: “I suppose one would have to define what a strong market is. In my mind, if one is implying that actively listed price reductions (if that is what is meant by “price declines
Sniglet wrote: “I am curious as to how you think an agent should deal with a Bellevue home-owner who asks if they should sell their house now, or wait a couple of years (assuming they are in no rush to sell, but know they eventually want to move to Los Angeles in 3 or 4 years)?
Should the agent just say it is impossible to tell whether it would be better to sell right now or in 2011?”
Yep, it’s impossible to know. Of course an agent could pretend they know and say it will be better now–in order to get a listing.
Realistically, I’ve never had anyone ask me that far out. Typically they have a more recent event occurring, such as a retirement or school ending, etc., and that even it less than six months out. For example in that Kitsap listing I mentioned, there was a retirement in February, and thus they wanted to sell in the dead of Winter. I looked back the prior two years and there wasn’t a lot of seasonality to the sales in that area, and so I told them that winter wasn’t a bad time for their area, but I didn’t make any claims that the market would go up or down while they waited.
Roger,
You still have to work out the Macro to fine tune to the Micro. You can’t do one without the other.
Amen, Brother Larry!
It is a very fine line between showing off your competence, and then saying that it has it’s limits.
Clients often do not want to feel the burden of living with their decisions, so they foist it upon the professional.
Any estimate of future values (or interest rates, or lending conditions, etc.) MUST be phrased as an opinion, and generally with some estimate of level of confidence.
Additionally, I think professionals should also remind their clients from time to time of their own existing biases and self-interest, just to be on the safe side.
The expireds reflect the slowing sales and higher inventory. When push comes to shove, something has to give!
For the same area as I gave the other figures, here are the numbers
———–2008—–2007
Expired——9——–6
Canceled—–8——–4
I haven’t looked deeper into that, to see for example if it was relisted an sold.
BTW, on the neighborhood specific thing, if you go 0 to 2 miles south and a bit newer, there you’ll find people who cannot sell for what they paid in 2006! So even the neighborhood specific numbers I gave aren’t useful to them, because it’s outside their neighborhood and their neighborhood is different (slightly newer).
Ardell, “I’m calling Absorption Rate as of now, 10 months.”
Hi,
I’m not understanding your math.
I just checked KC stats
If you count ACTIVES and PENDING INSPECTIONS together
12,498 (active) plus 667 (pending inspection) equal 13,165
There are currently 1768 PENDINGS
You get 7.4 months of inventory at the current rate of sale.
(PENDINGS are generally not counted until the insepction period has been negotiated to the satisfaction of the buyer)
If you do count the Pending Inspecton as PENDINGS we have
12,498 Actives and 2435 Pendings or 5.1 months
??????
“Realistically, I’ve never had anyone ask me that far out.”
I’ve had many people ask me that far out. More importantly we all have clients who need the answer even if they don’t think to ask the question.
We all have people who say they might switch jobs, or move back to X, etc… They don’t have to ASK if they can sell in 1-3 years without taking a loss, for the agent to have to answer the question. The agent still has to determine the range of possibilities and liklihood, so that the buyer is purchasing with informed consent.
Product selection is key. If someone is thinking of moving in the near term, I always try to lean them towards something they can easily add value to as a cushion. The clients I walk away from in most markets, strong or weak, are the ones who want the perfect house and may move in a few years. Perfect, by definition, has no place to go but down.
So whether you are asked the question or not, it is nearly impossible to be in the business of representing people who buy and sell real estate, and have no opinions as to future value.
Several times I knew a buyer was likely going to move in a year or two, even when they did not know it themselves. Sometimes, given the number of buyers and sellers we have dealt with over 18 years, we can see it coming before they do. That’s what the mean by “It’s the experience”. If we are not going to use our experience of 18 years to assist clients…then what good is having the experience?
Ardell:
#52, agreed, but many clients already get the Macro (housing prices are falling nationally), but need you folks to drill for data on the Micro (homes in Hunt’s Point probably are not responding in similar fashion as homes in Roy, WA).
Roger,
I mean the Macro for King County as a whole (not just nationally) and the Micro for Bellevue. Or the Macro for Bellevue as a whole, but the Micro for Factoria vs. The Microsoft Zone.
You can’t get an economics degree without taking both Macro and Micro Economics, and you can’t look at a market from simply one or the other. Both are required.
Greg!
You know I wrote that just for you 🙂 But I have to go show a property in Bellevue…be back to answer that one shortly…
Ardell wrote: “You still have to work out the Macro to fine tune to the Micro. You can’t do one without the other.”
Okay, I’ll bite. What do you mean by that? That you have to determine what all of King County is doing to determine what a neighborhood is doing? If that’s what you meant, I’d disagree. And even if you mean a MLS area, I might disagree, depending on the area. For example, areas 330 and 340 are very diverse, with many different types of neighborhoods.
Greg, I think Ardell may be backing out some of the “stale” pendings, which probably isn’t a bad idea.
OK Greg, Kim’s showing Bellevue so I’m free until we are showing Green Lake later on.
No Kary, I’m not backing out the stale pendings.
Greg, let’s talk about what Aborption Rate actually is. It is the length of time you expect it to take to sell the current inventory. Current Inventory is at least, by anyone’s definition, 7 – 8 months. Everyone knows for SURE that December and January sales are never EVER equal to the number sold in July or August. So saying 7 months based on July rate of sale is misleading…no?
To say it will take Sept., Oct, and Nov. (3 months) to sell off current inventory, you have to do that at the expected rate of sale of those months, to be accurate.
So at the time I wrote this post, there were 12,403 Residential properties on market. Then we look at the level I expect things to close in the first chart above.
12,403
-1,425 for August 08
-1,350 for September 08
-1,275 for October 08
-1,175 for November 08
-1,075 for December 08
– 800 for January 09
-1,000 for February 09
-1,200 for March 09
-1,300 for April 09
-1,400 for May 09
10 months takes us to 400 properties, but a 5% variance is within a normal margin for “error”. Hoping to have 7,500 in inventory by December 31st of 2008 leaves room for inventory to come on market by 1,400 more properties than leave market during that same period. 7,500 may move us from buyer’s market to seller’s market. I’d have to calculate that based on facts available when and if inventory every drops to that level.
To say 7 months based on June or July when you know that January never equals July, paints a more optimistic picture than the facts suggest. No agent expects January sales to equal July sales…do they?
“People who are proud of their work don’t want to admit that they still are rather uncertain. And the clients frequently don’t want to hear that part, either.”
Reminds me of The Weatherman 🙂
When I started saying no, you can’t expect to sell this in 2 years and break even, people didn’t “want to hear that part”…you are correct.
I remember the first person I said it to and they are very happy right now. They loved the place they were renting BTW. If they HATED the place they were living, we would have to factor in the value of upgrading lifestyle over the short period. But they loved their rental, it was closer to everything they wanted to be near than anything they could afford to buy. All points led to stay where you are.
Still, the buyer looked at me and said, “No? I won’t for sure make money if I move in 1-2 years?” He clearly wanted me to say yes, and in 2004 and 2005 I did say yes…but not that day. I told him the only way to get to “yes” was to buy something he could add value to, and we found that property, but his wife wanted perfect. Perfect depreciates like a new car leaving the showroom…
Kary said “Okay, I’ll bite. What do you mean by that? That you have to determine what all of King County is doing to determine what a neighborhood is doing? If that’s what you meant, I’d disagree.”
Well then you’ll have to disagree with the Wharton School of Business…because that’s where I learned it. You want to disagree with them…go right ahead.
Clearly in real estate you MUST factor in your best educated guess of what is coming down the pike. For example, many people invested in the CD at the point where it made sense to do so. Knowing when that point is, is critical to success. Not guaranteed, of course. If results could be guaranteed in anything, there would not be winners and losers. But those who can see what’s coming are almost always more successful than those who can’t see what’s coming…or those who think no one can see what’s coming and so don’t bother trying.
Clearly when you bring a pile of dough to an investment firm, you expect them to be in the business of TRYING to see what’s coming. To suggest otherwise is ludicrous. Real Estate is no different.
Sometimes I say “I can break you even on this one” and the next house I’m saying “You better die in this one, as I’ll never be able to make you whole here”.
Haven’t been wrong yet in 18 years, Kary. That’s a lot of ups and downs and 5 States. Not wanting to try is no excuse for saying “NO ONE CAN!” So speak for yourself, please.
Clearly almost every professional must study their field and hone their craft and make educated guesses and assumptions. That doesn’t change if they are a butcher, a baker or a candlestick maker. It only changes if you are “a salesman”. Then it doesn’t matter what you are selling and you don’t thave to know your product or factor in the economic environment. And that’s OK.
Lots of agents are salesman, but the State Agency Law says we represent people for a living and we do not sell houses for a living, and I like the State’s version best. I agree…it’s not for everyone. I won’t expect you to do it my wayk, but please stop acting like everyone has to do it your way or they are “pretenders”. That clearly is not true.
You can say no one is always right…I’ll agree with that for sure. But stop acting like no one can do what you choose not to do.
As a consumer, I feel like I am seeing price drops — especially in the last month. Here is a fairly typical example:
http://www.redfin.com/WA/Bellevue/1522-164th-Ave-NE-98008/home/500554
Last sold 9/2006 for $417k. On market today for $350k (down from asking of $450k in April).
Ardell wrote: “Haven’t been wrong yet in 18 years, Kary. ”
So the 2nd quarter 2008 prediction was a first? 😀
BTW, to be clear when I said you don’t need to look at the macro, I was taking about determining price at the point in time, not some point in the future (because that is impossible–I don’t attempt the impossible).
Alan, that’s a short sale, and probably has been since the price set in June. The original price of $450,000 might have been set to avoid a short sale, rather than market conditions.
Anyway, it’s possible that the thing would have sold at $417,000 today, if that price had not been a short sale. Many/most buyers/agents avoid short sales for the reasons discussed elsewhere here. They’re harder to sell.
Ardell wrote-
“Clearly when you bring a pile of dough to an investment firm, you expect them to be in the business of TRYING to see what’s coming. To suggest otherwise is ludicrous. Real Estate is no different.”
I always thought the rigor to be an investment advisor was more than a RE agent. Am I wrong?
Here’s a question…
Can a RE agent be sued for giving financial advice about home price appreciation/depreciation?
I thought there was a case earlier this year.
Q-Diddy,
Actually it was the opposite. The owner sued for NOT being warned about the state of the market. The owner lost.
Given all the advice stock brokers give without being successfully sued, I think it would be really hard to find liability for an agent. The situation where stock brokers are successfully sued typically involve much more than just a prediction.
Q-Diddy,
In most fields it’s the experience vs. “the rigor” to become. An investment advisor on their first day on the job is generally not a whole lot more qualified that an Realtor on their first day on the job, I’d say. Speaking from personal experience…often no more rigor involved from one to the other, depending on the firm.
I was in Bank of America a couple of days ago helping someone choose between an 80-20 fund and a 60-40 fund. The B of A rep wasn’t more qualified regarding stocks and bonds than most agents are about home values, I’d say.
Kary,
You aren’t trying to say you aren’t seeing price drops as to real value, are you? No one selling for less than they paid a year ago, without it being a short sale? If values weren’t down, there wouldn’t be any short sales…would there?
Ardell, I didn’t look at the area around the listing to determine whether it had gone up or down. But even at the same price it previously sold for it would apparently be a short sale because it was a fairly high percentage loan package. I was basing my comments on the original loan amounts and assuming they had not paid them down significantly.
What I’m saying is I wouldn’t use a short sale situation as a comp (unless I was to do a short sale), or evidence of prices declining. The field of buyers for short sales is too limited. It’s too bad it has to be that way, but for that I blame the banks.
Re short sales, I’ll bet at the moment there are more due to excessive borrowing of equity than from paying too high a price one or two years ago.
Be interesting to see that speculation backed up, or refuted, with data. Not sure where to look.
And, just so I understand the disagreement, Kary, you are not suggesting that homes (in general) in King County are selling for more today, than July of 2007, are you?
There seems to be ample evidence, both statistical and anecdotal, to say otherwise.
I suppose one could argue that short sales and REO’s could be pulling down the numbers (average, mean or median), and by excluding them, there could be a case for less price drop, than without.
There’s data from other areas (CA, AZ, etc) as to how many are in that category. Do either of you (Kary or Ardell) have that data for King County? Is that info that MLS provides, or tabulates?
“Do either of you (Kary or Ardell) have that data for King County? Is that info that MLS provides, or tabulates?”
I’ve done some numbers on it, Roger, and clearly it’s affecting the median price of pending sales. Agents have to be warned about short sales and possible affects on commission. So often the agent remarks section will have some keywords like “short”, “subject to bank approval”, subject to lienholder approval”, “foreclosure”, etc. I’ve done searches based on these keywords and then checked the listings that came up. Once in a blue moon “short” was a short plat.
These are not “pulling down the numbers” at present. Moreso the fact that they aren’t closing is pushing UP the numbers as to closed data. They are pushing down the numbers on pending sales, but not closed sales, as far as I can tell.
I had a rough count that 1/2 of the short sales were closing before the distressed property law went into affect. From what I can see, more are not closing since agents have more often refused to open escrow without prior bank approval.:
Roger wrote: “And, just so I understand the disagreement, Kary, you are not suggesting that homes (in general) in King County are selling for more today, than July of 2007, are you?”
No, not at all. Overall the county is down. Some parts really down! But that means there are other areas that are down less than average, or not down at all.
As I mentioned somewhere, there are four NWMLS areas that have both the mean and median over July, 2007, but I’ve not analyzed those to see if there’s a reason for that that would discount that (e.g. selling much larger houses or more new houses, etc.).
What I’m saying is the county-wide numbers mean very little to any individual.
thanks!
I just happened to come across this in today’s Times, a report from Zillow saying 9% of homes sold at a loss last year.
http://seattletimes.nwsource.com/html/businesstechnology/2008108389_webzillow12.html
Roger, I have no idea whether more short sales occur do to paying too much or borrowing habits. There are really at least three possible causes of a short sale: (1) Buying at the top of a market and selling shortly thereafter; (2) Buying in any market and selling shortly thereafter; and (3) Refinancing away equity. 1 and 2 are less likely the more money is put down at time of purchase.
Also, I wasn’t trying to say that short sales were dragging down the mean or median. It’s possible/likely that’s the case, but to what extent I have no idea. What I was trying to say is that in valuing a house (for a seller of buyer) I wouldn’t use a short sale as a comparable property.
Roger,
I have that on my desk, but I didn’t hold out any hope that Kary would take Zillow’s word for it, so I didn’t mention it 🙂
Does that Zillow report factor in closing costs? If so I could see that number being accurate.
Some short sales occurred after the purchaser started to make improvements, the net effect being the property was in worse condition. Stuff ripped out in preparation for new…but new never happened. Half gutted, etc… So looking at a property that sold for less than the owner paid is often (from what I have seen) about the condition of the home being lesser than it was at time of purchase.
There’s no way to genralize about short sales. You have to view them on a case by case basis. Since there aren’t enough of them to impact median sold prices, it’s not worth the effort.
The only reason they are dramatically impacting pending data is because they are stacking up from back in May and not closing. More and more staying in pending and adding to the ones staying in pending. There’s 3-5 months worth of them in escrow both as pending and pending BU. There’s also a significant number in Pending Inspections as the buyer’s won’t do the inspection until they get bank approval.
Looked like 1,200 of the pending transactions as of this morning were short sales. (residential King County). I didn’t comb through them, but based on keyword searches, it came to 1,201.
The data set provided by Zillow is amazing, well worth the effort to get there.
Do you think it’s acccurate?
http://www.zillow.com/static/xls/2008Q2_Seattle_Tacoma_Bellevue_WA_MSA.xls
Not sure if this link will work.
Hard to say if it’s accurate, without knowing the area covered. If it includes parts of Snohomish and Pierce, it probably is accurate.
Note the owner equity stats. I really doubt the median down payment was 10% for six years.
Ardell wrote: “Some short sales occurred after the purchaser started to make improvements, the net effect being the property was in worse condition.”
I should have mentioned that since that describes what happened to my old neighbor. His wasn’t so bad it was a short sale though.
Roger,
Here a good article based off the same Study.
Homeowners Delusional On Value of Property
Another:
Home Value Drop Leaves Thousands Underwater
Let’s not forget that lenders are also lending lower percentages, which when combined with lower prices can leave people stuck in mortgages they don’t want (e.g. adjustable mortgages).
Ardell,
To figure absorption rate, you simply divide pendings into actives.
Trendgraphix, shows the following AR’s (Months of Inventory on Pended sales)for King County single family homes:
5/07 3.3
6/07 3.8
7/07 4.5
8/07 5.6
9/07 8.2
10/07 7.1
11/07 7.3
12/07 8.9
1/08 8.2
2/08 6.8
3/08 6.7
4/08 6.8
5/08 7.4
6/08 7.2
7/08 7.2
As you can see in the post above, as of TODAY, I figured the AR to be 7.4.
Under 3 months is considered a Seller’s advantaged market, 3-6 months is considered a balanced market, and 6 months plus is considered a Buyer’s advantaged market.
Since 9/07, the third month of the liquidity crisis, AR’s have been remarkably stable which is unusual.
We cannot take today’s inventory numbers and plug in estimated future Pendings to create any sense of AR’s. Ardell, you should know in working with numbers that both supply and demand continually change. For every month you estimate pendings, you’ll have to estimate actives, as the actives WILL change, as well. Remember all the sellers that take their homes off the market mid December? How are you factoring this into your AR theory?
December and January will usually have the worst AR’s based on supply and demand and even then, based on the trends I’m seeing, will be surprised if Dec/Jan AR’s go higher than last year.
I’d agree with Greg on the absorption rate issue. If you’re going to start predicting future sales you might as well start predicting future inventory, and then at that point the AR is whatever you say it is.
On the other hand, I sort of like Ardell’s result better, but I’d get there by either using the pendings that are less than 45 days old, or the sales of the past 30 days. Neither involves predicting the future, but both get you to about 10 (pendings would be just over and sales just under).
We haven’t had 2400 closings in a month all year, so using that to determine how many months of inventory there is doesn’t seem realistic.
Kary,
Close to 3000 homes dropped out of the market on the supply side between 9/07 and 12/07. I doubt we’ll see 10 months AR in KC in Dec/Jan which should have the highest AR’s of the year..
“but I’d get there by either using the pendings that are less than 45 days old”
Why?
We also have 2-3 year Actives in the mix. Throw those out too?
To measure statistics, there must be a constant. We can’t make up rules as we go and then expect any kind of reasonable measurement to the market.
In Ardell’s method of “calling” an AR rate, how will that compare to next month’s AR? and the next? Especially with numbers based on projections?
FWIW, AR’s can be computed from Pendings or Solds. Pendings offer the most accurate way to tell what a market is doing right now.
Great discussion. It almost makes me happy that I am still looking for a house and therefore still read real estate blogs.
denismurf, I thought we were locking in a loan during our last conversation (if my memory serves, which it doesn’t always).
“Sellers need to know if selling next year is better than selling this year. Sellers need to know when they get an offer today, if that offer is or isn’t likely the best offer they are going to see in their timeframe. Buyers need to know if they can sell in 1-3 years without taking a loss.”
Ardell – If even a tenth of the realtors(R) out there could recognize this basic premise, there would be a much greater public respect for the “profession.”
You’re obviously one of the best. Too bad you don’t work the area I am slowly, slowly, eventually, going to buy in (slowly, since I don’t at all think I can sell in 1-3 years without taking a loss, although this is not the “advice” I receive from any of the bazillion desperate-for-commission-it’s-a-great-time-to-buy-sales-are-picking-up-you-can’t-time-the-bottom realtors(R) I run into).
Hi Alan,
A few very small points to your comment. Pendings are not used to estimate demand. Pendings are demand (listing sold but not closed). The Actives represent supply.
I understand why some feel the need to fine tune the Pendings. Yes, there are some that stay Pending longer than normal. There are others that go in and out of Pending status within a matter of days. On average the length of time a listing is Pending is consistent. Pendings are the best indicator of recent activity.
No. Buyers are demand. Pendings are a way to measure buyers.
It is like saying that the thermometer reading is the temperature. The thermometer might be next to a hot water pipe or it might be on a cold surface which will give you an inaccurate reading of the temperature.
Sales are a more accurate way to measure buyers, but there is a larger delay between the demand and the time you can observe that demand. Pendings are used to get a quicker observation but you get that at the expense of accuracy.
Look at it this way, Greg. The rate to absorb current inventory can’t possibly be 7.2 months vs. the 10 months I am using. Current inventory is 12,387 (it got better since this morning).
Total sales since 1/1/08 are10,197. If the last 7.2 months didn’t equal 12,387, how likely is it that the next 7.2 months will equal 12,387? 10 months is probably more accurate.
We’ll just have to come back in 7.2 months and see if 12,387 homes have sold…and then do it again in 10 months. But if what they say is true, and “hindsight has 20/20 vision”, then 7.2 months can’t possibly be more accurate than 10 months.
Ardell,
First of all, the way AR’s are calculated and used are not my invention. AR’s have been used and calculated in this matter for years and years. This is one of the main ways that real estate researchers and statisticians use to understand the markets. To see a long term study on local area Absorption Rates, go to http://www.alanpope.com and look in his market statistics. You’ll see the monthly AR history there from the early 90’s.
Second, your logic is flawed. You are publishing YOUR future projections on what you think will happen against today’s active inventory and “calling” an AR!. How will you account for the 3000 sellers who remove their listings from the market in December? (Hmmm our 12,000 listing suddenly became 9000 — funny thing! Let’s just subtract a month for that! Ok, now just like magic without any sales we’re at 9 —yeah I like that, 9!!!) Furthermore, there is no way to adequately track your method (projections) with consistency over time.
Figuring AR’s is quite easy. If you have 100 homes on the market and 50 go Pending this month, you have 2 months of inventory at the current rate of sale. If you have 100 and 25 go Pending then you have 4 months at the current rate of sale. And so it goes.
When it’s said that there is 7.3 months of inventory that is for the current rate of sale. It has absolutely nothing to do with the future — or the past. But you can mark this 7.3 on the last day of each month and readily see what direction the market is going (or look back upon the market history) from the aspect of supply and demand.
If you want to invent a new method for tracking inventory and can prove consistency and reliability in your method over time, I say go for it. Just name it something other than Absorption Rate.
Hi Alan,
We’re chatting here in circle semantics. I consider an active buyer as someone who is out looking at homes who may or may not actually buy. Statistically I don’t know how we can measure my definition of an “active buyer.”
From purely the statistical point of view, for me Active listings are supply, the Pending listings (sold) are demand. AR’s and the subsequent Sales Ratios are a measurement of this supply and demand.
In the Seattle PI real estate article published at the first of the month WSU Director of Real Estate Research, Glen Crellen, referred to Pendings as the “best measure of current activity.” I agree with this.
Greg,
The definition of Absorption Rate has nothing to do with Pending Sales. Here’s a Jerry Rossi (who claims to have introduced the concept of Aborption Rate to the resale homes market) explanation.
http://realtytimes.com/rtpages/20060623_absorptionrate.htm
I learned it from a fabulous Broker in L.A. But the fact remains that Absorption Rate is the # of months it WILL TAKE to absorb current inventory, and has everything to do with the future and time. Current rate of sale is not consisistent for the future timeframe noted, and so can’t possibly be the most accurate wqy to estimate the length of time it will take to “absorb” current inventory.
Perhaps those that come off but don’t sell will equal those that come on during the 10 months. But that doesn’t matter. We’re not estimating the time it will take for inventory to be Zero…it will never be zero. We are estimating the time it would take to sell 12,387 homes, and that is NOT 7.2 months from today.
Ardell,
Here’s what we agree on:
Absorption rate is the # of months it will take inventory to absorb.
I contend, however, AT THE CURRENT RATE OF SALE. (Google “real estate absorption and you will find article after article that agrees with this). AR’s can also be computed as “Weeks of Inventory” and factored by the Quarter as well.
Nothing to do with Pendings? You’ve got to be kidding! Pendings are the recent solds. However, as I said above, AR’s can also be factored against CLOSED sales, however leading real estate researchers consider Pendings the best measure of current activity.
Here’s a link from the Federal Reserve Bank of San Francisco regarding housing AR’s:
http://www.frbsf.org/publications/economics/letter/2006/el2006-15.html#subhead1
Here are a couple of excerpts explaining the value of AR’s as I view them:
“The so-called “month’s supply of housing” ratio, or the number of new housing units for sale in a given month divided by the number of new units sold, is also fairly useful for predicting investment downturns.”
It goes on to say,
“This exercise indicates that prices seem to be considerably less useful predictors of downturns than quantity-type measures. This might seem surprising because, unlike sales volumes and inventories, prices have a forward-looking aspect and thus would seem to be good predictors of the future state of the housing market. ”
Here is a Wiki answer:
The number shows the rate at which the inventory of homes for sale are being sold. A declining figure indicates people the inventory is decreasing as more homes are being sold than are coming onto the market. A rising absorption rate implies that there are more homes coming onto the market than there are buyers willing to buy at the market prices. The absorption rate lets you know how well the market is absorbing the current inventory of listings. The ultimate question the absorption rate answers is, “Is the current inventory level shrinking or growing”?
Ardell,
Virtually every statistical entity follows AR’s as I have presented them including NAR, the NWMLS, and Seattle Bubble where The Tim does a find job breaking down MLS area Months of Supply http://seattlebubble.com/blog/2008/02/16/2007-neighborhood-months-of-supply-breakdown/
Rosso’s formula may work for an individual listing presentation. I wonder how it works after the sudden downturn of the 3rd quarter 2007. This formula is convoluted at best for overall market statistical measuring.
It certainly has nothing to do with how you present AR’s in the body of your post! Sorry, Ardell, It’s just not correct.
Greg Perry wrote: “We also have 2-3 year Actives in the mix. Throw those out too?
To measure statistics, there must be a constant. We can’t make up rules as we go and then expect any kind of reasonable measurement to the market. ”
I was looking for that constant. I didn’t like Ardell coming up with an AR based on a prediction. If you had that, you’d have different ARs based on who was doing the calculation. That’s absurd.
But no, you wouldn’t through out the old actives. It works sort of like unemployment, where if you’re looking you’re counted, if you want to work but have given up, you’re not counted.
The whole point though is that this is supposed to be a determination of how many months it would take the current inventory to sell. I don’t see how you get there including every pending, no matter how stale.
And again, I think pendings are inherently an issue, so perhaps using the last 30 days sold (or last month’s sold) would get you a better result.
Ardell wrote: “Buyers need to know if they can sell in 1-3 years without taking a loss.
Greg wrote: “FWIW, AR’s can be computed from Pendings or Solds. Pendings offer the most accurate way to tell what a market is doing right now.”
I’ve thought about this statement, and I think you may be focusing on the fact that pendings are more current, because sales typically are written 30-60 days before closing.
So I could see how pendings would be more “current” but I’d think solds would be more “accurate.” A sold is a sold and there’s no question whether it’s going to ever close, when it’s going to close, or if it’s being counted more than once in doing monthly ARs.
Re 95: That was just a preapproval, Rhonda.
Good catch! – Denis
Kary,
“So I could see how pendings would be more “current
Greg, thanks for posting the link. Interesting how the pending and sold AR flip flop from time to time. I was trying to see a seasonal pattern, but don’t see one.
“…leading real estate researchers consider Pendings the best measure of current activity.”
As did I at one time, Greg. When inventory is lower and can be counted in weeks instead of months or even years, then weekly pendings is an excellent method. When we had 1.5 months of inventory and I was calculating Absorption Rate in April, then clearly using pendings was the most accurate method.
But when you have almost a year of inventory, or more than a year of inventory in the high end, using pendings in the month with the highest rate of sale historically, will give you a false optimistic result. Likewise, and as I brought up back in November and December, if you use the rate of sale in November with Inventory of 8 months, you will give a false pessimistic result.
The best method changes, Greg. There is no one best answer for all times. When inventory is 1-3 months, then pendings and rate of sale is a more accurate method. When inventory is a year, then expected closing rate for the period forward is the best method.
It’s really a pretty simple argument. Go ask 10 people if using 2,400 pendings is a good barometer if only 1,500 of them close in a month, and within the next 3 months that number could drop by half. When the difference is double to half, then you need a new method.
Acceptable margins for error are rarely 50%, and the difference between January sales and June sales…well, let’s take a look.
Jan. 07 – 1,356
June 07 – 2,697
Jan. 06 – 1,438
June 06 – 3,095
That’s enough data to prove that a 50% variance is not uncommon.
Now add to that the fact that pendings have become just downright WHACKY! There was a time when you could expect the majority of pending to close. Loose lending standards made it virtually impossible for anyone with the desire to buy to be turned down. Today, the rate of closing of a pending sale is clearly not dependable.
Forget about “stale” listings…how many of those sold this week are going to close or become the stale listings of the future??? We have a ton of stale listings in pending for months and months because the success rate of a pending going to closing is diminishing. That renders the pending data, be it current or stale, inaccurate and undependable.
Yes, I absolutely DO change the rules as I go along. When a rule no longer makes sense…it’s time to change it, and I don’t ask anyone’s permission to do so. I only care that the information on which my clients’ rely is as good and dependable as I can give them, and if I have to break a few rules to give reliable info…then I break the rule until I am confident that the info I am providing is the most reliable.
Once pendings cannot be relied upon to close within an acceptable margin of failed closings, you have to throw pendings out. And unfortunately, that is where we are in this market. Using old methods once things change creates surprises for your clients…and often negative surprises. Not acceptable to let your clients be blindsided, because you were married to a method that upon logical examination didn’t hold water.
Yes, your method was once reliable. Now, it no longer is.
Pendings can also be misleading where developers rustle up “pendings” to make it appear there is a bigger demand for their development properties (e.g., a new condo complex) than in fact exists. If you track these pendings for a while, you will see the same units reappear on the market at a later date, hopefully (from the seller/developer’s pov) after some genuine buyers were snuckered into based on the fact demand. That marketing gimmick is old as dirt. So, it is very important that buyers know how many actually/really close, not just ones that go into escrow.
This all gets back to the inherent conflict of interest between buyers and thier agents, when their agents only get paid for closing a sale. Sorry, I know that issue has been kicked around on many a post on this and other blogs. But, I simply expect RE agents to come up with “statistics” that somehow, someway indicate “its-a-great-time-to-buy”.
Sorry, Ardell,
I’m not buying into your discourse. When Pendings fall out, they go right back to the supply side. As you look at Alan Popes historical data, you’ll see all markets, good and bad represented in which the Pending sales have always been used. Agan, Glen Crellen, Director of Real Estate Research at WSU was quoted in the PI article as saying Pendings were the best current measure of the market.
However, if you want to use Closed sales in calculating AR’s then that’s fine too.
All that being said, the most generally accepted measurement for AR is how many months of inventory are available AT THE CURRENT RATE OF SALE.
1-3 months is a Seller’s advantaged market
3-6 is a balanced market
6 plus is a Buyers advantaged market.
“Yes, I absolutely DO change the rules as I go along. When a rule no longer makes sense…it’s time to change it,”
Another way of saying you don’t like the way the facts are coming out so the next best thing is to change the rules?
“married to a method that upon logical examination didn’t hold water.”
MY method lacks logic? Calling an AR based on personal projections (not fact) with other moving factors on the supply side is good logic?
“Yes, your method was once reliable. Now, it no longer is.”
You need to take this argument to NAR, real estate researchers and economists . They’re all still using it! and have been for years.
I’m afraid this is going nowhere. At this point I think we should agree to disagree.
um …. that should be “fake demand”, instead of “fact demand”.
I need a copy editor!
Ardell,
“Even back in 2004 when short term future projections were good, one had to determine if the current owner already anticipated and captured future value (I call it “sucked out the future equity) for 2 to 3 years forward.
Ardell, I think you’ve correctly identified a problem, but your solution is not well thought out. You can’t have a measure of market strength that is dependent on what the agent thinks the market will be like in the future! That’s very circular.
If you don’t like pendings, use sales.
I’ll have to work backwords on the comments.
Kary #115 – If you use hindsight with Jan 08 of 950 and June 08 of 1,596, well that works better than pendings. I just think Jan 09 will be closer to 800 than 950.
I have absolutely no problem with using hindsight vs my projections. Let’s do it!
12,376
– July 08 of 1,503 = 10,873
– June 08 of 1,596 = 9,277
– May 08 of 1,565 = 7,712
– April 08 1,508 = 6,204
– March 08 of 1,453 = 4,751
– February 08 of 1,246 = 3,505
– January 08 of 950 = 2,555
– December 07 = 1,324 = 1,231
– November 07 of 1,424 = (-193)
I am not using hindsight sold data because the spread between March and June or February and June or February and July, is not following a traditional pattern. Consequently I don’t expect the first quarter of 2009 to be as high as to volume of sales as first quarter of 2008.
But using actual data vs. projections (if that makes you feel better) we can say that we have a 9 to 10 month supply of inventory, using both hindsight and forward projection. But it’s not 7.2 anyway you slice it.
These numbers being as accurate as possible is critical, as coming below the 6 month mark as to inventory heralds the switch from one type of market to another type of market.
But then the blue band can switch…can’t it? 😉
http://albertarealestatewatch.blogspot.com/2007/10/calgary-real-estate-board-balanced.html
After we agree how many months of inventory we have, and I think we can all agree after this exercise that it is 9-10 months and not 7.2 months, we then have to agree when we move from buyer’s market to balanced market. How many months is a balanced market? I say 2-4 on that one and buyer’s market after a 4 month supply and not 6.
Clearly a buyer isn’t going to look at a property on market for 4 months and say “it’s still a seller’s market”. I say anyone with a house on market for 90 days or more, is not a seller grinning and saying “I’m glad it’s still a seller’s market”. Anything over 60 days could be considered balanced, but over 90 and surely over 120 days is a buyer’s market. That gives us something else to disagree about.
Ardell wrote: “I am not using hindsight sold data because the spread between March and June or February and June or February and July, is not following a traditional pattern. Consequently I don’t expect the first quarter of 2009 to be as high as to volume of sales as first quarter of 2008.”
Not following traditional patterns? Why would you care? The goal is to determine the AR, not to determine the traditional AR.
And if you don’t like the comparison of past volume to current, then why are you assuming the future will resemble the current? Things change.
“After we agree how many months of inventory we have, and I think we can all agree after this exercise that it is 9-10 months and not 7.2 months, we then have to agree when we move from buyer’s market to balanced market. How many months is a balanced market? I say 2-4 on that one and buyer’s market after a 4 month supply and not 6.”
Precisely the problem Ardell. You seem to be the only one here in agreement — with yourself. Even your link to the blue zone defines the AR as inventory/sales.
Now you are attempting to redefine what a Balanced and Buyers market is?
By Kary, “And if you don’t like the comparison of past volume to current, then why are you assuming the future will resemble the current? Things change”
Bingo
Ardell,
Your entire premise is faulty and based on projections that I would never agree to anyway! You are projecting 1075 sales for December and 800 for January. How are you coming up with this?
Question: Again, in your accounting, how will you reconcile the 3000 homes that will likely leave the market during the holidays? This is really MORE than one month, more like 2 months of sales. This alone could take as many as 3000 out of your starting number. That puts us already at 8 months by your logic.
Another question: How will you keep any kind of historical record of performance? You are projecting. How will we know in fact where the ACTUAL AR comes in to compare with your 10 month AR projection to see if your theory is correct or incorrect? How will you track your results?
Final Question: How will you change the rest of the world of real estate research and tracking? The Tim needs to know what to do.
Since Pendings has become such a large part of this discussion, let’s take a closer look at King County Residential Pending sales.
There are 2,561 transactions currently “in escrow”
2,561 – in escrow
116 are contingent on the sale of another property
19 are Pending Feasibility Studies
203 are actively looking for back up offers “PendingBU”
671 are Pending Inspection but only 374 of those are Pending Inspection within a normal timeframe of an inspection (since 8/1). 151 of them seem to be pending inspection since before July 15th. How long does it take to do an inspection? If you give 3 weeks for an inspection to be done and resolved, you get 453 pending inspection.
1,555 Pending
Of the 1,555 that are supposedly past most up front contingencies
349 are new construction (showing 2008 as year built)
75 were built in 2007, so most of those are harder to sell new construction. That’s about a two month supply as 37 of the 75 went pending before July 15th.
Looks like 275 of the 1,209 non-new construction pendings, went pending since August 1. 620 of them went pending in July. 129 went pending in June and 185 have been pending since before the end of May. Since none of them are new construction, the delay on those in escrow for longer than 45 days is likely short sale, REO or financing problems. Anyone’s guess as to the % of those that will actually close.
My point is that if a significant number of the 2,561 current pendings may not close, then some % of those going into escrow this week and last week won’t close either. So I’m not using pendings given their abnormal propensity to have difficulty closing.
Whether the pendings are fresh or stale, more of them are not closing than in the past three years. So using pendings as a barometer in 2005 and 2006 was likely a much better method than using them today. Perhaps that will change in the future.
I you look closely at the Pending numbers tracked you’ll see that they equal PENDING and PENDING BU statuses. Just like Active STI, they don’t count in the demand until a true Pending.
I have had issues with the definition of buyers,sellers and balanced markets. It’s not like 5.9 months and 6.1 months are that different. Just say what the AR is and don’t label it.
BTW, I noticed Kitsap county seemed to have longer DOM even during good times, and I’ve heard the same is true in other parts of the country.
“203 are actively looking for back up offers “PendingBU
When I started the AR conversion in comment 55, you’ll see that I was not using only PENDING and PENDING BU.
In all actuality, there is far less new construction sales affecting long pending this year than last.
But again, if you do not want to use Pendings, base your AR on Closed. Can be done either way. Just not as current to the present market.
Kary,
Pending BU is mostly to be used when the deal is “shakey”. In a market where buyers are golden, you don’t want to give them the idea that you are trying to kick them to the curb. It makes more sense to take back up offers in a hot market than a weak market. Backup offers help you with inspection issues. But if it takes you 120 days to get a buyer…you don’t want to tick off that buyer by actively pursuing a back up offer.
Since none of the Pendings are showing on the public sites anyway, it real doesn’t matter.
What you are saying is that ALL pendings can take a backup offer, which is true even though no pendings can be seen by the buying public.
NAR has had tons of discussions for as long as I can remember regarding whether or not properties should continue to be shown during escrow. The concensus generally falls to “it’s up to the seller” and most sellers want to be done with showings. So only those who want to continue to show their home while in escrow (most want to pack) go into Pending BU.
There are two reasons to actively pursue backup offers. One is if the deal is shakey for any reason. The other is if the harm to the seller, if the escrow falls apart, is more dramatic than usual. The problem with the latter is that actively pursuing a backup could CAUSE the first sale to fail, so it can become a self-fulfilling prophesy to suggest that the buyer in escrow may not close.
Any buyer or buyer’s agent should know that they can write a back up offer or any property, without it having to be Pending BU. Pending BU is a notice to buyer agents that writing a backup offer on this particular house may be of more value than on another listing in escrow for specific reason.
“But again, if you do not want to use Pendings, base your AR on Closed. Can be done either way.”
Previous statement: “If you want to invent a new method for tracking inventory and can prove consistency and reliability in your method over time, I say go for it. Just name it something other than Absorption Rate.”
Well then we are agreed. As long as you agree it is still called “Absorption Rate” if I used closed sales vs. pendings…we can shake hands and go back to our respective corners on this round. 🙂
Ardell wrote: “NAR has had tons of discussions for as long as I can remember regarding whether or not properties should continue to be shown during escrow. The concensus generally falls to “it’s up to the seller
“…they don’t count in the demand until a true Pending.”
We all agree that a pending sitting in escrow since May 2nd is likely not a “true pending”. My contention is that there is no way to know which transactions that went pending in the last 7 days will be sitting around come November, the same as those May 2nd dawdlers.
We can look into the glut and tell which are true and which aren’t. But we cannot scrutinze fresh pendings in the same manner. Clearly it is likely that the same % of those will follow suit and be tomorrow’s “stale pendings”.
Since using pendings is to gauge prepensity, then future prepensity expected to diminsh is clearly a relevant factor. When we get back to inventory being a 1.5 month to 3 month supply, I’ll go back to using pendings.
When I do a neighborhood, I don’t use pendings if nothing decent has been around to pend 🙂
Kary,
It’s really more of a warning to sellers that if the buyer in escrow gets wind that they are actively seeking a different buyer…it could do much more harm than good to do that.
Why? The buyer is in control still. Ordinarily the backup would only come into play if they defaulted or otherwise backed out.
“Well then we are agreed. As long as you agree it is still called “Absorption Rate
LOL, based on the fact that I like you a whole lot. Now I have to get back to Michael. 🙂
Ardell,
When you start whispering sweet nothings about absorprtion rates in my ear, well….. er……. what can I say…..it gets me HOT baby! (Just don’t tell Kim) 😉
ARDELL said: “…one had to determine if the current owner already anticipated and captured future value (I call it “sucked out the future equity) for 2 to 3 years forward.
Ardell said,
“For Instance. Property is in an area that historically appreciates lower than County Average (this is a real example BTW) Agent bought a 1,150 sf 1 story rambler and put it back on market in pristine condition. New roof, new siding, updated and sparkling everything. Agent gets top dollar for the house.”
Maybe so, but wouldn’t you like to have a listing like that? : -) And just how quickly did that house sell? Less than a month?
The sellers that are selling the pristine condition homes are definitely more likely to sell quickly and for top dollar than the ones that are selling the ‘add-value’ fixer or dated cosmetics homes.
And so, as you look deeper into the pendings or closed sales data, you’ll see market times for some at less than 30 days: those likely are the pristine homes. The ones that take 120+ days to find a buyer are not the pristine homes, nor likely are they in the best locations.
I don’t agree that the pristine homes already have the future equity sucked out of them. Depends on which neighborhood, and just how common that home is. If it’s a pristine Craftsman built in 1929 in the Bryant neighborhood, then I think that one is far better to buy than the dated grandma 1944 Cape Cod in the same neighborhood.
Buy the rare, coveted style in the best location and you’ve got a good formula for success in future sales profitability. In fact, if you find that rare one either in pristine or in dumpy condition, either could be a good choice if you’ve got the true ability to update/shine correctly.
Far too many buyers choose the wrong fixers, and/or simply have no taste or idea of what a future buyer will really be willing to pay for.
If you’re looking for a split in Bothell well then, yes buy the dumpy one and make it shine. But make sure it really shines in the right way, don’t put expensive, shiney, ugly marble or granite all over every surface of the basement … and especially don’t have your agent brag in the marketing comments how much you spent on that butt ugly stuff!
Leanne,
I don’t think we are allowed to badmouth certain neighborhoods the way you just did. That’s why I said ” Property is in an area that historically appreciates lower than County Average (this is a real example BTW) Agent bought a 1,150 sf 1 story rambler…”
It’s obsolete by square footage for the most part (not style) and I note the area is less than desirable based on historic appreciation rate, without naming the town it is in.
I was just a speaker on a panel about how to blog and not get sued. Right now, everyone in X city that you just named could sue you Leanne…maybe me too. So I may delete your reference to a specific area.
How would you feel if you lived in that area and were having trouble selling your house right now? I’m sure your broker would agree that you can’t suggest by name which areas are not as good as others, in your opinion. You can tell your client that. You can post the best neighborhoods. But I’m sure you can’t post the neighborhoods or cities that you consider to be less dersirable. For the record, my example was not in that city…nor would I tell you where it was. It’s not fair to the other homeowners who live there.
I don’t think it’s disparaging a neighborhood to indicate the market isn’t great there right now. But for fear of disparaging it, I’d mention that there was one rather expensive neighborhood that wasn’t doing too well the last time I looked. But I don’t think anyone would call it a bad or undesirable neighborhood–unless maybe you don’t like living near wealthy people! 😉
RE: 134
the current owner sucked out future equity
Ardell, just hold on a minute. I did not ‘bad mouth’ any neighborhood. Why would you say that?
My comments about splits in Bothell is that Bothell doesn’t have the coveted craftsmans and cape cods, so it’s a different decision there. I said nothing that was wrong, nothing that would get anyone sued, nor is there anything in my comments that should have been construed as being critical of Bothell.
And, since all these discussions talk about location being a critical part about a real estate decision — I might even add that Bryant is doing better than Bothell overall. And there are stats to back that up. The in-city neighborhoods are doing better than the outlying areas.
I sell homes in Bothell, as well as in Bryant. A buyer who wants to buy in Bothell probably won’t look at homes in Bryant, and vice versa. But, if I did have a buyer wanting to look at both areas, we’d discuss the homes we saw in each area in terms of which ones are most likely to hold value, be easier to sell in the future, things like that. It’s our job to have those discussions.
Yes, Michael (138). Not to mention blowing the budget, taking too long to get the work done, etc…
Kary,
Who better to predict the market? An agent/broker who is working in the trenches of the real estate market 7 days a week, views statistics available only to other realtors, talks to investors, home buyers, home sellers on a daily basis and otherwise lives, breathes, talks and walks real estate every minute of his life.
Or a writer from a local newspaper who has no real estate experience, quotes only the economists or “experts” who provide gloom and doom information needed to sell papers?
Everybody and anybody can give their prediction on the market, it is up to the reader to decide who they want to believe.
Thank you for the great analysis Ardell. Wonderful Post!
Riley, neither. Access to statistics only let you know what has happened. It doesn’t let you know what will happen. If you disagree with that then I don’t know why you’re a real estate agent for presumably you could have made a fortune looking at stock charts and quarterly reports.
No agent (or even broker) sees enough of the market to get a feel for the market. Last December I thought things were really picking up because my wife and I were extremely busy. It turns out for our MLS as a whole, it was the slowest month in six years!
And again, agents don’t have any training to make predictions. Those that do are merely guessing. There’s no real analysis to it. There’s no projecting unemployment/employment rates, interest rates, birth rates, etc., and concluding what sales/prices will be. They’re just looking at past sales/prices and making assumptions on where they will head in the future based on the past.
I’ll make this a separate paragraph for emphasis: Past prices and volume do not determine future prices and volume.
A real estate agent predicting prices from current and past statistics would be like a meteorologist making their predictions based only on current and past statistics.
I don’t agree. Weather is mother nature and completely random.
Investor behavior and psychology is not completely random. Investors tend to repeat past behavior in cycles. I believe that the same economic and finance theory that applies to other assets applies to real estate. If you believe technical analysis and fundamental analysis is flawed, then how should future price movement be predicted?
Real estate moves much slower than other financial markets. You can typically buy a stock one minute and then sell it 15 minutes later, and know almost exactly what you’ll pay for it and get for it (assuming you have real time data). Charts arguably are of some use to determine likely trends over the very short period of time (assuming no intervening news)
Real estate we don’t typically know what happened until 30-45 days after the fact, because of the time to close (and that ignore the MLS time to publish the data–and they’re typically the fastest). If you tried to predict based off something like Case-Shiller you wouldn’t even know what the present is until 2-3 months after the fact.
Thank you Riley,
This market here in Seattle reminds me very much of the market I started in in 1990 in NJ. This isn’t the first time this Country has seen the effects of “hard to finance”. Clearly double digit mortgages created a similar environment in the housing market.
It’s never all about the stats alone. It’s a combination of 18 years experience in residential real estate, and the stats, and what you see and here buyers and sellers and would be buyers and sellers doing day in and day out.
I do not think volume will drop below 15,000 residential sales in King County. Not 2008, not 2009 either. So using 15,000 total as to volume as my prediction point is really not rocket science. My
April prediction was for 16,500 or so. That gives us range of total sales (residential only: not including raw land, condos or multifamily) if between 15,000 and 16,500 for the foreseable future.
As I said in the opening of this post, to know if the market is doing better or worse than expected…you have to expect something. I expect volume to be in that range.
I am seeing buyers anticipating that the market will drop as to price, as a result of the huge change in volume of sales. So fair market value is predominantly falling on the buyer’s side.
Fair Market Value = The price at which neither the buyer or seller is exceedingly happy. Right now I think buyers are just a little bit happier than sellers by and large. Maybe not at time of offer and acceptance, but after they negotiate price and commissions and the home inspection. The real numbers are not showing as two levels of concessions are hidden factors without anecdotal info. That is why an agent on the inside can see what the stats don’t tell.
The hard part is not applying many years of experience…the hard part is removing self interest in the outcome.
RE: 145
I don’t agree. The business cycles may be longer. That doesn’t change the fact that the same finance and economic concepts apply to assets of all classes. Technical analysis can be performed as real estate and Case-Shiller is no different from portfolio investment historical data. As with all historical data regardless of the asset class, it is no guarantee of future investor returns. Nothing is guaranteed. Forecasts need to be evaluated with the associated risks. The time delay between mutual acceptance and close can be accounted.
Well I’ll have to disagree. Stocks are affected by very short term emotional issues. Take for example the recent “news” that the government actually had plans to bail out Freddie and Fannie! What shock that the government actually plans things. That rather obvious piece of information sent the stock market into turmoil, from which they had to be saved. Possibly didn’t affect the real estate market market at all.
But in any case, I also mentioned the time to sell. People don’t just see a piece of silly “news” like the one referenced above and call up their real estate agent to sell their home. Real estate is a much more rational, less emotional market. Although conversely, the fact that some areas were rising so fast did cause people to call up an agent and buy a condo that was yet to be built, that they had no intention of ever living in. So real estate can get emotional too.
Also, with stocks sales (with a drop in price) can cause other sales. With houses too many sales (with a drop in price) can cause people to not want to sell.
Kary, do you think that home buying/selling may also be impacted by “short term emotional issues”?
I did mention, what I would usually call panic buying–where people buy unfinished condos never intending to move in because they think they’ll go up more by the time they’re finished. It also happens when the average Joe gets into flipping. Stocks have that too.
But I don’t know whether you’d call what happened last Fall to be a short term issue. Obviously people panicked a bit, but was that short term or longer? And if there was a panic, it was mainly on the buyer side. I don’t think you saw a lot of people running out to put their house on the market because of the mortgage crisis. And on the buyer side, how much of it was emotional (“the sky is falling”) and how much of it was just based on bad information (“100% loans are no longer available)?
I think what makes it less emotional for people is most people don’t own SFR houses primarily as investments, and the ones that do are (overly?) convinced that they are a good investment.
I should mention I’m speaking of emotional in the sense of a significantly large group of people acting in a manner that affects the entire market. Not a single individual falling in love with a feature of a house and wanting to buy it.