There was a good post from Lawrence Yun, Chief Economist for the National Association of REALTORS® today that prompts me to comment:
The last sentence in Mr. Yun’s article was the most accurate and the most important:
“DOM for an individual property is very important and re-pricing will be necessary at some point if the property’s DOM rises. However, an average DOM figure for the market as a whole may not be a good indicator about how to price the home.”
Every possible measure of the health of the housing sector has become a point of intense scrutiny. Days On Market is one. As the NAR article points out, DOM can be helpful when discussing the market position of a specific property relative to its competition in a specific neighborhood or market segment. Broadening the perspective, however, can be misleading. I have discussed many times how “hyperlocal” the business of real estate is, and that is extremely true in considering DOM. Take the Austin Metro market as a whole, for example:
Clearly, that chart shows Average Days On Market up very significantly compared to a year ago. March and April 2011 are encouraging, but if this was the only information you had you might well be led to the conclusion that Austin real estate is struggling. DOM in April 2011 is up 33% from April 2010! That can’t be good, right? Now, here’s another look at that information, but with a second point of reference: absorption rate — i.e., how long existing listing inventory will last at the current pace of sales:
The line graph is the same data shown in the first chart, but note the grey bars. My regular readers know that most market watchers consider about 6 1/2 months’ inventory to represent “balanced” market conditions. Perceived “market power” of buyers and sellers change subtly near that number, but when inventory grows past about 8 months sellers who really want to sell will likely have to make more concessions (i.e., price) than they would in a “6-month supply” market. On the other hand, when the supply of homes on the market supply drops to 4 months or less buyers find they don’t have as many real alternatives as they would like and sellers can gain the upper hand in negotiations.
In the Austin metro area, listing inventory in April 2010 represented 4.2 months’ supply. In April 2011 it was back to 4.1 months’. We have spent all of 2011 so far with 6 months’ inventory or less, and that is true despite considerable growth in new listings over the past couple of months because that was matched by growth in new sale contracts. (And as I pointed out in two recent posts, average prices in this market have remained relatively strong. See Updated Austin Market Dashboard and More on home values in Austin area.)
Keep in mind that much depends on perspective. There are many local markets in the U.S. that would envy us averaging just 75 to 80 days on market. Most would certainly envy just 4 months’ supply. Then again, I have talked with sellers in just the past week in specific market segments in which “Months Supply Of Inventory” range from 2 months to 14 months. Discussions of market analysis, property preparation, and pricing are different in those very different market conditions.
Generalizing any local statistic and assuming it is meaningful on a regional, state, or national scale can be very misleading. I thank NAR for pointing out the fallacy of focusing on wide-ranging DOM measurements. If you have specific questions about your home and your neighborhood, call me or talk to your favorite real estate professional. You deserve better advice than you’ll get from an stories about the “national” real estate market.