There’s a stat that doesn’t get much love. It’s not sexy, nobody really writes about it in the newspapers, and most people don’t even know what it is. But it’s really important because it helps us tell how hot or cool the market is. I’m talking about the sales to list price ratio. Oops, did I lose you? I know, a topic like this sounds painful, but let’s consider why this actually matters. Then if you’re interested I have a huge local market update below to discuss slumping volume and slowing momentum. Any thoughts?
What is it? The sales price to original list price ratio is one of the best ways to gauge the temperature of the market. It’s the relationship between the final sales price and the original list price, and it’s expressed as a percentage.
If we only had one stat: We could likely get a pretty good understanding of how hot or cold a market is based on this metric alone. So without looking at price, inventory, or sales volume, if we simply saw a market had a 100% sales to original list price ratio, it tells us properties on average are selling for what they listed for. That’s a sign the market is hot or at least buyers are willing to pay what sellers are putting out there.
When we see this ratio moving up or down, it helps us get an idea of what the market is doing. For instance, over the past six months the sales price to original list price ratio has declined in Sacramento County, which tells us the gap has been growing between what sellers are asking and what they are actually getting. The most recent ratio is 96%, and that means on average properties are selling 4% lower than their original list price. That’s a powerful stat, right?
Not being anal, but ORIGINAL matters: It can make a huge difference if we’re looking at the original list price or the most recent list price.
Looking at the most recent list price makes it seem like the market isn’t cooling all that much. After all, a 99% sales to list price ratio still sounds pretty good. Yet this stat hides the real trend that properties on average are actually selling 4% lower than their original price. Thus if we’re not careful we can totally misunderstand the market despite good intentions. That’s sobering, right?
The “Bubble” years:
Right now 96% feels dull, but imagine 87%. Yikes!
Action Step: With so much talk about the market softening these days, it’s a good idea to pay attention to lots of different metrics – and especially the sales to original list price ratio. Keep in mind if the ratio isn’t available through MLS, it can always be run manually by dividing the final sales price into the original list price. For instance, all sales in Sacramento County this month totaled $512M while the original list price for all these sales totaled $533M. When I divide $512M into $533M I get 0.96 (or 96%).
I hope this was interesting or helpful.
—–——– Big local monthly market update (long on purpose) —–——–
Dull is a perfect word to describe this fall season. Actually really dull would be more accurate. Let’s consider some of the bigger themes happening right now in the market.
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A week longer: It’s been taking about a week longer to sell this year compared to last year in the region (technically 8 days).
Prices softening: Prices normally soften during the fall season. If you don’t believe me, look at the graphs below. This year the median price is down by 6% from the height of summer in the region. This doesn’t mean every neighborhood or price range is down by that much, but there is a more defined softening present this year in many price ranges. Sellers would be wise to price according to listings that are getting into contract rather than the highest sales from spring.
Sales volume slumping (please read): Sales volume is only down by 3% in the region this year, but the bigger stat is volume is down 11% over the past four months. This is definitely something we need to watch closely to see how it unfolds. In short, if volume rebounds to normal levels as 2019 begins, then we’ll chalk this slump up to a dull fall season like we had in 2014. If volume persists to decline though we’ll correctly call this a new direction for the market. So is this seasonal or not? I’ll tell you in a few months or so….
Momentum change: The rate of price changes has slowed lately. What I mean is in years past we’d regularly see 7-10% price increases when running stats, but over the past few months we’re starting to see only 2-6% increases instead. I talked about this last month, and the new stats show this same trend.
Ironic power exchange: There has been a power exchange lately where buyers have been gaining market share and sellers have been losing it. Of course we know sellers have struggled with being out of touch with the market as they’ve been prone to overprice. It’s been easy to point this out all year long, but ironically we’re starting to see something similar with some buyers thinking they’re completely running the show when in fact it’s not quite a full-fledged Buyers’ market.
I could write more, but let’s get visual instead.
BIG QUESTIONS:
1) How did the market change from last year?
2) How did the market change from October to November?
3) What’s happening with sales volume?
SACRAMENTO COUNTY VOLUME:
Key Stats:
- November volume down 6.5%
- 2018 volume down 1.4% (January to November)
- Annual volume is down 2.1% (past 12 months)
SACRAMENTO REGION VOLUME:
Key Stats:
- November volume down 12.1%
- 2018 volume down 3.3% (January to November)
- Annual volume is down 3.4% (past 12 months)
PLACER COUNTY VOLUME:
Key Stats:
- November volume down 9.3%
- 2018 volume down 5.6% (January to November)
- Annual volume is down 6.1% (past 12 months)
4) MOMENTUM IS SLOWING:
November:
Past 90 Days:
Entire Year:
DOWNLOAD 100+ graphs: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).
SACRAMENTO COUNTY (more graphs here):
SACRAMENTO REGION (more graphs here):
PLACER COUNTY (more graphs here):
I hope that was helpful.
DOWNLOAD 100+ graphs: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).
Questions: Do you ever use the sales price to list price ratio? Why or why not? What do you see happening in the market right now?
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Thanks Ryan. As they say, “the proof is in the pudding”. The market is slowing down… but not crashing.
Thanks Tom. I appreciate your take. It is definitely slowing down for sure. For the bigger picture of where the current trend of how slumping volume is going to play out, I think we need to get out of the fall season to see where things go. That’s going to give us a much better picture. Like the saying goes, everyone has market knowledge with the benefit of hindsight….
Obviously it is too early for anyone to say ‘the market is not crashing.’
Real estate markets don’t flash crash like equity markets, we need this spring/summer to see if the market is in fact crashing or slowing. Either is a possibility, what isn’t possible it to say which has happened yet.
Well said. Agreed. I think it’s very easy to make big claims about the market, but time is our ally to figure out what the market is doing, and we have to understand that and exercise humility and patience. I can’t wait to see the stats in coming months and hear the word on the street from the real estate community.
Nice post Ryan. Great job setting the table for whichever direction the region goes in the spring.
I’m going to add list/sale price ratio to my tables. Do you ever look at affordability?
Thank you Joe. I like the way you said that because the table is set and now we will wait. That’s as good as it gets.
I don’t look too much at affordability indexes because I know what they are saying. The market is becoming less affordable. It’s not valuable in my mind to look up new affordability data each month because: 1) I know which direction affordability has been heading for quite some time; and 2) We see the effects of affordability in the market by watching things slow up. So while I don’t pull new affordability metrics every month, in some senses I’m paying attention to affordability all the time.
I love this. List/sale price ratio gets ignored by a lot of agents but I track it in a dozen cities around the region and find it really shows how different markets here are doing. Last month, for example, Granite Bay had a 90% ratio and a 3-month inventory of single-family homes. Compare that to Folsom with a 98% ratio and a 1.5-month inventory.
That’s great Gordon. Good for you. That’s so smart to look at because not all markets are the same – even within the same county or zip code. Please keep me posted if you see anything interesting with this ratio. I think we can also consider the price range too as some markets might have a different sales to original list price ratio depending on the price point.
True – I’m sure that much of Granite Bay’s 90% ratio is due to the higher price point there. But El Dorado Hills also has a high price point and the ratio last month was 97%. Not sure why – maybe sellers in Granite Bay have an unrealistic opinion as to how much value having a Granite Bay address brings?
That could be. Some markets have less data too, so that could also play into the metric. In other words, the metric is going to be stronger or more meaningful depending on the number of sales. This is why I like Sac County as a whole because we have the most sales out of any surrounding county. It’s thus a very solid number. But does it represent every price point? Of course not. I wonder what is normal in some markets too. I’d be curious to see EDH and Granite Bay over a few years to see what normally happens during the fall. If you end up discovering anything, I’d be fascinated to hear. Thanks again Gordon.
Great data presented clearly, thanks, Ryan.
Thank you sincerely Anthony. I appreciate it. I was up very late putting this together, so I was hoping it would be fairly readable. 🙂
Ryan, would this metric not change at different times of the year due to seasonality? In the last quarter, sellers/agents may still be riding on the high prices of summer and not realize that demand may be less at this time of year.
Hi Tom. Thank you. Like clockwork this metric does change with the seasons of the market. I like to think it helps reflect what the market is doing during different times of the year. I think you’re right that some sellers may still try to ride the high tide of summer into the fall, so in part it’s natural to see this metric decline. But some years are different than others. This year, for instance we are down a bit more in the fall from last year, but in 2014 when the market was really dull we saw a few months in a row at 96% (only one month so far this year). Overall today being slightly lower reflects heightened softness in the market as well as rampant overpricing that’s plagued our market all year long.
It’s worth noting this ratio can certainly exceed 100% too. During a really aggressive market in 2013 we saw three months in a row where the ratio was 101%.
One thing I’ll note. It takes quite a bit of data to change this number. Being that we have anywhere from 1300 to 1700 or so sales typically in Sacramento County per month, it’s meaningful when we see this number change more significantly since many properties have to come together to make up the data.
Great discussion topic Ryan. I think you said it all and it is important to always look at how the list to sales price ratio is being calculated.
Thank you Gary. Well said. We have to know how the numbers are being calculated. Sometimes that can make all the difference.
Everything Bubble 2.0 is slowly deflating almost everywhere. The question is not ‘are we in a bubble?’ it is whether the pin has been pricked yet or not. And what pricks the bubble is unimportant. All bubbles are in search of a pin prick. Where the pin prick comes from is inconsequential and shouldn’t be the focus of any scholar or investor.
I contend that this spring and summer will be marked by spiking inventory and continued low sales volume. A toxic combo for any RE market.
This will officially be the start of the big cyclical bear market in real estate that is long overdue after a decade of ZIRP and QE in which we simply papered over the last Bubble 1.0 and did not allow true organic price discovery or income-tied valuations as we should have. Reflation of Bubble 1.0 was the clear result.
If the market is healthy this spring and summer, which I suspect it will not be, it does not mean we have escaped the realities of gravity, Bubble 2.0 will still implode, just after the can has been kicked further down the road, again. This will make the inevitable crash much more substantial.
Couple this with a recession which should happen relatively soon by all metrics and we have massive downward pressure on the real estate market for many many years.
As Ryan famously says, ‘we will have to just wait and see.’ Which I generally agree with too, with some caveats.
Love it. Thank you Mr. Miyagi. I appreciate your commentary. The line at the end made me laugh. These next months are critical. I think you are right that even if the spring persists to look normal in terms of stats, that doesn’t mean there are not underlying issues or red flags so to speak. We will be watching closely to see how things unfold, and I’ll keep sharing…
One interesting tidbit from 2005 in terms of sales volume is we began to see monthly volume drops at 15% or so and it very quickly went up to 20-30%. There is certainly no recipe for the way a market has to change, but it’s nonetheless fascinating to look back on 2005 and see what happened then.
Agreed. I think this spring/summer is extremely critical in terms of getting a handle on where this market is headed on a macro-level. The only way to get ahead of the curve in terms of knowing what that may look like IMO would be to talk to high volume agents and see if they have a lot of sellers ready to list inventory this spring.
I am very curious to see if sellers storm the exits. I tend to think it will be mostly the ‘specuvestors’ that will be looking to dump this spring, not necessarily the organic shelter buyers. I think the issues are gonna be with these newer HGTV floppers when they realize they will not be making any money.
I think 2020 is going to be very very very ugly in the US, economically and in terms of real estate stresses. Let us know if you hear any ‘watercooler’ talk from honesg high volume agents that have a lot of new sellers painting and prepping for a spring sale.
That’s keen insight. Gauging new listings is key. We also have to consider if there are as many buyers. Watching pending contracts is also worthy. I concur though that the real estate community has a wealth of insight. Over the years I’ve though it could be helpful to develop some sort of survey for the real estate community, but I’ve never pulled the trigger. I’ll keep everyone posted with the “word on the street” (watercooler talk) as I hear it.
For all of the agents that have been pushing the ‘there is no available inventory so prices will keep skyrocketing lie,’ here is a snippet from Sonoma County…
“In November, the county’s median housing price fell to $615,000, a decline of nearly 9 percent from the record peak of $700,000 in June, according to The Press Democrat housing report, compiled by Rick Laws of Compass real estate brokerage.”
Translation: valuations plummeting in the face of having lost over 5 thousand homes in last year’s fire. Yes, 5 thousand less homes yet prices plummet. Please square this one for me NAR fans.
Thanks Mr. Miyagi. I’d be curious to know what the seasonal market normally does in this area. Obviously one big takeaway though is a disaster doesn’t fully change the market forever or trump the possibility of slowing. On a related note I have some data to share probably this week from a colleague based in Chico. It’s astounding to see how the market has changed in Chico in light of the town of Paradise being wiped out.
Well I can with certainty tell ya ‘seasonal’ there is not losing 5,300 homes from the housing stock and pricing dropping almost ten percent from summer highs.
Hi Ryan – Wow, I am always amazed by how much work you put into gathering this information and dingit in such a basic, simple, easy to understand format. Thank you. We are lucky to have you.
One thing that has come to mind the last few months is that I just see the market “Widening”, meaning the top 5% – 10% of homes (in condition, location. etc.) are still holding their values for the most part. There are many, many areas and neighborhoods that I don’t know much about as far as recent market activity, so I may be completely wrong as far as the bigger area, but in the neighborhoods and areas I do pay attention to, it seems the market for the “not so perfect” home is absolutely changing…
So it seems like the biggest factor in our median and average prices showing weakness is the drop in values or widening of discount of the average and below average home. In many areas, the best conditioned homes are still selling fast with multiple offers at prices that are new “Highs” for the area.
Thank you Forth. I really appreciate the kind words. Hmm, that’s something I’ll have to watch. Keep me posted with what you see over time. The market is certainly segmented where different portions have different trends. Regarding the not-so-perfect home, my observation is buyers are really picky today, which means sometimes a home that needs a little something more will suffer loss because it ends up standing out like a sore thumb. But part of that is sellers being out of tune with buyer expectations by overpricing. Keep me posted with how you see this unfold Forth. Thanks again.