What was your worst public interaction in recent years? Think of a time when you were mean or rude to a complete stranger. You might not have intended to come across that way…. but you did. Ouch! We’ve all been there, and while I wish I was an exception, I’m certainly not. Now think of the person who experienced you as rude or mean. You might be the complete opposite in most of your life, but all this person knows of you is from that one unfortunate moment. Your larger body of work (your life) shows you are a kind and friendly person, but when someone only sees a clip of your life instead of the entire reel, that person may not have an accurate picture of who you really are.
The same thing happens in real estate. Sometimes we get so fixated on the most recent moments of data that we don’t see the bigger picture of the market. It’s like we see the trees instead of the forest, which also means we end up talking about “trees” to clients instead of giving them a fuller picture. Let’s take a look at a few examples below to help show how a wider focus on the numbers can be a huge benefit when trying to digest and explain the market.
Three examples of using consecutive months vs. last year:
Month: Sales volume declined 6.1% from September to October.
Year: Sales volume is up 7.9% when comparing October 2014 with October 2015.
Month: It took two days longer to sell a house last month than the previous month.
Year: It was taking one week longer to sell a house last year.
Month: The average price per sq ft declined by nearly 1% last month.
Year: The average price per sq ft is currently 7% higher than exactly one year ago.
I know, we can make numbers say whatever we want them to say, and that is something we always have to be careful of in real estate. But sometimes when we only compare sequential months, we are missing something important: The seasonal market. Since real estate tends to behave in a fairly predictable cycle each year (hot spring season and cooler fall), it becomes very powerful to make comparisons not only with consecutive months, but on a yearly basis. In other words, it’s telling to see what the market was doing in October 2015 compared with September 2015, but it’s just as relevant (if not more important) to compare October 2015 with October 2014. For example, in the case above when we only look at consecutive months, we might report that sales volume is declining, it’s taking longer to sell, and values are declining. Yet when we pan out for a wider view by comparing numbers from October 2015 with October 2014, we see a more well-rounded picture of the market. Sales volume is actually higher this year, it’s taking one less week to sell a house, and values are also higher than they were at the same time in 2014. Don’t get me wrong, monthly information is incredibly valuable and we need to pay attention to how the market is changing right now. But at times too much emphasis on consecutive months of data can obscure our view of the bigger picture. Thus we are left saying things like, “Sales volume is declining” or “values are dipping” when the bigger story is sales volume is actually higher this year (and it’s normal for values to soften in the fall).
Action Step: Next time you talk about the market in a newsletter or in an appraisal, compare numbers over the past couple of months, but also talk about numbers from last year too. For example, in coming weeks if you discuss sales in November, you can compare November 2015 sales with October 2015, but make it a point to also compare November 2015 with November 2014 numbers. It can be very eye-opening to make comparisons like this. I might suggest talking about sales volume, inventory, days on market, and price.
Remember, there is no one right way to explain the market. Just do your best to see the bigger picture (the forest) while you explain the latest (the trees).
I hope this was helpful.
UPDATE: I’m not sure I was as clear as possible, but consecutive monthly trends are VERY important to digest so we know if the market is slowing or growing. This is why I advocate using a CMA to gauge the temperature of the current market as well as knowing the signs of a market slowing (this requires us to use month-to-month numbers). This post is simply highlighting the importance of gleaning a better context for interpreting and reporting the market.
Questions: How do you see the forest through the trees in real estate with so much information these days? What are the positives and negatives of comparing month to month vs year over year?
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Very helpful post, Ryan! I have been guilty of doing just that. I have a question for you. We are all trying to determine what the long term trend is. What are the best indicators to look for?
Thanks so much Jana. I think we all have things to learn, and I know I am always figuring out something new about the market and how value works. The interesting part is the market is always changing, which throws us curve balls for interpreting it and then talking about it. One thing is for certain: We can always say something new or interesting about real estate if we are watching closely. All we can do is hone our skills and keep growing, and I commend anyone reading this who is doing just that thing (that’s what I do too).
The long term trend? That’s a tricky one because the best minds in the world get it wrong all the time. I would say there is no such thing as a crystal ball, so predicting the long-term trend is just a guess. Beyond the typical drivers in real estate, there are so many other factors that can come into play too that end up impacting values (war, stock market collapse, domestic turmoil, local job market collapsing, recession, etc…). Overall in my mind the economy, consumer confidence, interest rates, and financing are some of the big things I pay attention to when considering the long-term market. I tend to ask myself how much upward value potential there is too, and what the market might look like if some of these aforementioned things were to change. After all, when some of these things change, it tends to impact housing inventory, which is a big deal in my market since real estate in my area is very sensitive to housing inventory increases. For instance, the difference between 2 months of housing supply and 2.5 months is very noticeable despite not being that much of a difference when just looking at numbers. Things like interest rates, lending guidelines, and the job market can impact inventory too. With that being said, we do see the market tend to go through swings, so that is always important to keep in mind as markets don’t always feel hot or glamorous. Sometimes they get cold, correct, and/or decline. The market over the past few years has been driven by interest rates, cash investors, and financing for the most part. So the question becomes, “what now?” What can lead the market in the future? Always a good question, and I’d love to hear anyone’s take.
Thanks Jana.
Because we are typically retrospective regarding the market, to be prospective would be out of character and require specialized knowledge and expertise. With that said I would guess that those who have been in the same market would have a sense of what is going on without a lot of number crunching, just by being active and paying attention. I often talk to mortgage brokers regarding mortgage initiations, they seem to be the front line many times.
Well said, Mark. I think you’re right about generally knowing the market by paying attention. It’s amazing what can be gleaned when talking with various real estate professionals, watching, and crunching numbers as relevant. I learn so much from local Realtors, and what I pick up about the market from them is incredibly valuable. Despite paying attention to the market though, my observation still is the real estate community could grow in seeing the seasonal market every year and communicating that to clients. This is true for both real estate agents and appraisers. If we are not in touch with seasonal trends and how the market tends to behave from month to month, it’s easy to miss the market and/or not communicate it as effectively to clients.
Absolutely, I guess what I am saying is in this age of “non-contact” I feel we need to reach out to mortgage/real estate professionals; along with following your blog and others like “The National Real Estate Post” and the “MPA Highway”. You have made an excellent point in seeing the forest for the trees. It hits home with me as a former forester in CA.
Gotcha. That makes great sense. Thank you for the kind words too. A posture of “non-contact” in real estate is dangerous on so many levels. In an age of mass data and Collateral Underwriter too, appraisers are going to struggle to fake it over the long haul maybe. Thanks Mark. Right on about having been a forester. On a side note, I’ve been itching to get a chainsaw to do some woodworking projects out of logs. 🙂
By the way, if any onlookers are interested, the California Association of Realtors recently did a webinar forecast for housing in 2016. It’s worth a listen in the background while working (or just watch for an hour). Enjoy. http://www.car.org/marketdata/videos/
I agree with you completely Ryan that while we all can predict as much as we want there is no crystal ball. If I was forced to make a prediction I would think that housing would continue on an upward trend in the next few years. I say this because I feel like there is still quite a bit of pent up demand. My millennial generation has a very low homeownership rate compared to past data but they are coming. Some are waiting a little longer to get married, waiting a little longer before they start families, paying off student loan debt and getting themselves in a good position to buy before doing so. Many of them have seen the not so distant meltdown and have experienced foreclosure , short sale, BK, etc or at the very least have been close to someone who went through one of them. Some are on the sidelines still but they see the great long term investment value of owning and will be buying soon.
Again, this is a guess based on what I see and feel. Like you said there are economic factors that can change things. Policy decisions that can effect the industry and such that we are in no control of.
Whatever the future brings I’ll be here writing good mortgages for well qualified buyers and helping them gameplan homeownership. #MattTheMortgageGuy
Thank you Matt. I always appreciate your take, and it was great to run into you in the food line at SAR yesterday.
There are some Millennials doing very well financially and others who are struggling with student loan debt. It seems like sometimes all Millennials get lumped into one category, but they really aren’t all in that same category (as you know). Interestingly enough I saw an article on Trulia about rent vs. buy for Millennials (http://www.trulia.com/blog/trends/millennials-rent-or-buy/). The article ultimately said Sacramento was slightly more affordable to buy than rent, though it’s important to note the writer’s calculations and stats were based on Millennials putting down 20% (which can make buying stats sound more affordable, right?). I would guess putting 20% down does not happen in most cases as it’s not easy for people in many generations to put that down in CA. I would guess FHA at 3.5% is far more popular as a loan product for younger Millennials at least. This underscores the issue for the future. Affordability these past few years has been more possible in light of lower interest rates. In a sense the tail has wagged the dog in that rates have driven real estate to a large extent. Now we need wage growth and the economy to kick it into high gear if we want to see buyers able to afford the market (without special and creative financing and new loan products of course).
Fannie Mae is now at 3% down for qualified buyer (albeit at higher interest). I would consider the monthly payment affordability. I am getting a sense from the mortgage side that for many the monthly payment is starting to get our of reach for the typical buyer. If their are fewer qualified buyers then the demand side could be adversely affected. Payment ratio is now circa 43% of income so that has increased the supply of buyers, but I would suggest that is pretty high. Thus, my opinion that the price ceiling is at hand.
Thanks Mark. This will be important to watch. If interest rates rise too, over time it will impact affordability to a certain extent. The big question in my mind is whether lenders will introduce new “creative” loan products to help offset any change in affordability from interest rates rising. We shall see.
Lending has gotten more difficult via TRID, etal. They have added a sub prime product recently, but they must still demonstrate ability to repay. The jury is still out on TRID, it looks like primarily delays in funding.
True. I like your last sentence. It reminds me of the NREP guys who likened TRID to Y2K. Big scare, not much real impact thus far apparently. We shall see.
It’s too early to have any wise words for me to type, but you have a beautiful way with crafting your words, and taking a step back for the big picture. I just want you to know, how much I appreciate your approach to your blog posts. Thanks Ryan. Great post.
That makes my day to hear. Thank you so much Heather. I appreciate that. By the way, I’ll send you a picture of that tea set Steve won at SAR. #teatime
Great Point, Ryan!
Yesterday, I was completing a smart history graph of median sales price showing +7.3% gain over the past 12 months for sub-market. But, I knew better in this particular market, looked at a 2 year chart of same and saw where even with the +7.3% increase of recent, this market was still down 18.7% from 2 years ago. It would have been mistake to apply a time or market adjustment for increasing prices when this market is still so battered from correction. A historical perspective points out the obvious, ugly or positive. Bill
Ah, where the rubber meets the road with a post like this. It sounds like you are really thinking through your market, Bill. Good for you, my friend.
Want to be a part of this blog.
Hi Perry. What do you mean?
Great post Ryan. This blog post can also be used to highlight some of the problems with using only the 1004MC to analyze the market in an appraisal. For example, the last two months could have been down but the most recent quarter still show as up. Or the sample size of competing properties in the neighborhood might be only a couple trees.
Bingo. Nail on head, Gary. I’m glad you mentioned that. I tend to pay VERY little attention to the 1004MC when I do lender appraisals for this very reason. The inaccuracy of the form can can be especially potent in say January or February when buyers are willing to pay higher prices, but sales over the past 90 days might technically suggest otherwise. I found this to be particular true in my market last year. The fall was very dull, and then the market woke up early in January. It’s not that values increased exponentially in January, but buyers had basically picked up where they left off in the summer before prices began to cool. This looked like a huge increase in value when looking at sales from October to December, but it was really the market getting back into the swing of things before it went soft in the fall. The 1004MC would have showed a declining market though with the limited data.
Very true Ryan. In addition to looking at one year back I find it helpful to look as far back as 5 years to really see the whole picture and see how we fit into the bigger picture at the current time. This helps to see if we are back to where we were during the good times. While we may be doing better than last year AND see an increase in the market we may still not be where we were during the real estate boom, or maybe we are.
Great point, Tom. Very true. One year gives us some context, but multiple years can be even more of a help at times. I will say there have been a few times I have looked so deeply at the numbers over the past few years that I didn’t see the present market as well as I could have. This is when it’s important for me to get up from the desk, pour some coffee, take a walk, and then come back with fresh eyes. Thanks again.
I’m definitely guilty of doing this myself… and in more areas of my life than just one! Thanks for the reality check.
Thanks Stephen. I appreciate the sentiment of your comment. Blessings to you.
I’ve found that month’s supply is probably the best way to forecast home price changes in the short term. 4 to 6 months supply means normal prices increases. Under 4 months supply means prices are increasing more than normal. Under 3 months supply means prices are increasing rapidly. Over 6 months supply means no price increases.
It’s best if you can estimate months supply for the neighborhood because some neighborhoods will be a lot hotter or colder than others. Look at the current number of homes listed for sale in the neighborhood and then divide by the number of sales in the last month (or if there aren’t a lot of sales in the last month, than the average number of sales each month over the last 3 months).
Also, some markets, especially cold northern markets, are very seasonal which complicates things. Home prices in Chicago, for example, tend to increase in the spring and actually fall in the fall.
Hi John. Thank you sincerely. I always appreciate your take. Your point on looking at inventory by neighborhood is key too as different neighborhoods in the same market could easily be exhibiting different trends. Each market is different in terms of inventory thresholds. Your numbers above might make perfect sense for your area or even many areas, though I am confident values would be declining in Sacramento if housing inventory was 4 months at the moment. I do agree with you on housing inventory being one of the biggest factors to watch when considering the direction of values. I’m glad you said that. While the market has many facets that make value move, good ‘ol supply and demand is a huge force.