Real Estate Market Metrics 101

Why Understanding Market Indicators Matters

Want to excel as a real estate agent? Mastering market analysis is essential, and it's a skill you can start developing now, even while you're still in real estate school. Understanding market trends empowers you to advise clients effectively, price properties accurately, and anticipate market shifts. This guide breaks down the key indicators—median and average home prices, days on market (DOM), inventory levels, interest rates, foreclosure rates, and the absorption rate—providing clear explanations and practical examples. I’ll show you why a holistic approach to market analysis is crucial and how local conditions and seasonality influence these metrics. By the end, you'll have the knowledge and confidence to navigate any market.

Median vs. Average Home Price

Median Home Price:

The median home price is the middle price of all homes sold in a particular area during a given time.

For example, if five homes sold for:

$200,000

$220,000

$250,000

$600,000

$700,000

The median is $250,000 (the one in the middle).

The median, being less affected by outliers, is a reliable measure when there are a few very expensive or very cheap homes that could make the average less accurate.

Average Home Price:

To find the average home price, you simply add up all the sold home prices and divide by the number of homes. Using the same prices above, the total is $1,970,000. Divide that by five, and you get an average of $394,000.The average, while useful for spotting general trends, can be heavily skewed by extremely high or low prices, making it less reliable in such cases.

What These Prices Tell Us:

If median and average prices are rising, it often means home values are going up. If they’re falling, it might mean the market is slowing down.

Days on Market (DOM)

Days on Market (DOM) measures how long a home takes to sell.

• Short DOM (under 30 days): Suggests a hot market with many interested buyers. This is often called a seller’s market because sellers have the upper hand.
• Medium DOM (30-60 days): A balanced market where buyers and sellers have similar power.
• Long DOM (60+ days): Suggests a more extraordinary market with fewer buyers. This is often called a buyer’s market because buyers have more choices and bargaining power.

Inventory Levels (Months’ Supply of Inventory)

Ever wondered how long it would take to sell all the homes on the market if no new ones were listed? That's what a month's supply of inventory tells us.

How to Calculate:

Months’ Supply = (Number of Homes for Sale) ÷ (Number of Homes Sold per Month)For instance, if there are 600 homes for sale and 200 sell each month, you can easily calculate the months’ supply as 600 ÷ 200 = 3 months, giving you a clear picture of the market conditions.

• Low Inventory (Under 4 Months): Seller’s market.
• 4-6 Months: Balanced market.
• Over 6 Months: Buyer’s market.

Interest Rates

Interest rates affect how much it costs to borrow money to buy a home.

• Low Interest Rates: More people can afford homes, so demand usually goes up.
• High Interest Rates: Fewer people can afford homes, so demand usually slows down.

The Federal Reserve’s policies can influence these rates, so it’s smart to keep an eye on their announcements.

Foreclosure Rates

Foreclosure rates tell us how many homes are being taken back by lenders because their owners cannot pay their loans.

• If foreclosures are high, it can mean that the economy is struggling, and home prices might drop because many distressed properties hit the market.
• Foreclosure data can be found on local government websites, local MLS systems, or online real estate data providers.

Absorption Rate

The absorption rate shows how fast homes are selling in a certain area.

• How to Calculate:
  Absorption Rate (%) = (Number of Homes Sold in a Given Period ÷ Number of Homes Available) × 100

For example, if 100 homes are for sale and 20 sell in one month, the absorption rate is (20 ÷ 100) × 100 = 20%.

A higher absorption rate means homes sell quickly (seller’s market), while a lower rate means they sell slowly (buyer’s market).

Seasonality: How the Time of Year Affects Indicators

Real estate activity often changes with the seasons.

Spring and Summer:

These seasons are a hotbed for real estate activity. Many buyers are on the lookout for homes when the weather is pleasant and before the new school year begins. This surge in demand often results in shorter DOM and escalating prices.

Fall and Winter: These seasons bring a shift in real estate dynamics. With fewer buyers in the market due to colder weather and holiday distractions, homes may take longer to sell. Prices, in turn, tend to remain stable or experience a slight dip.Understanding how seasonality affects your local market is not just a skill, it's a responsibility. It can help you advise clients on the best time to list or buy a home, ensuring they make the most informed decisions.

Looking at Indicators Together: Two Scenarios

Relying on one number can be misleading. By using multiple indicators, you get a clearer picture.

Scenario 1: Seller’s Market

• Median Home Price: Rising for the last six months.
• DOM: Dropped from 40 days to 15 days.
• Inventory: Went from 5 months to 2 months of supply.
• Interest Rates: Remain low.
• Foreclosures: Very few.
• Absorption Rate: Increased to 25%.

Analysis: Everything points to a seller’s market. Prices are going up, homes sell fast, inventory is low, rates are low, and there aren’t many distressed sales. This means sellers can expect strong offers and may not need to lower their asking prices.

Scenario 2: Buyer’s Market

• Median Home Price: Flat or slightly decreasing.
• DOM: Increased from 30 days to 60 days.
• Inventory: Rose from 4 months to 7 months of supply.
• Interest Rates: Slightly higher than last year.
• Foreclosures: A bit higher than normal.
• Absorption Rate: Dropped to 10%.

Analysis: In this market, buyers have more choices, and homes sit on the market longer. With rising inventory and slower sales, buyers can negotiate more and might get lower prices or better terms.

How Market Indicators Affect Appraisals

Appraisers look at recent home sales and market trends to determine a home’s value. It's crucial to understand that market conditions can significantly influence appraisal values. In a hot seller’s market with rising prices and low inventory, an appraisal might come in higher because comparable homes sell quickly and at higher prices. In a slower buyer’s market, appraisals might reflect lower prices, especially if there are many homes for sale and fewer sales to compare against.

Focusing on Local Data: More Specific Sources

Real estate is local. National numbers can give you a big-picture idea, but local data tells you what’s really happening in your area. Here are a few resources to help you find local information:

• Local MLS Systems: For example, CRMLS in California or Stellar MLS in Florida provide data on listings, sales, and DOM.
• Government Websites: The U.S. Census Bureau can provide population and housing data. Some cities and counties also have their own websites with housing reports, like NYC Housing and Vacancy Survey.
• Real Estate Portals: Websites like Realtor.com Local Market Trends or Zillow Research can offer local statistics on prices, rent, and more.

By checking these sources, you can get the most accurate information for the neighborhoods where you work.

The Limits of Market Analysis

Market indicators can help you understand what’s happening, but they aren’t crystal balls. Conditions can change quickly due to new jobs in town, changes in mortgage rules, or shifts in the local economy. Also, predictions based on indicators are not guaranteed. It's crucial to be cautious and mindful, remembering that these tools guide your decision-making but don’t always tell you exactly what will happen in the future.

Putting Your Knowledge into Action

By learning about these market indicators, you can better guide your clients, set fair prices, and know when to act. Remember to look at multiple indicators at once to get the full story. Also, focus on local and seasonal trends, pay attention to how conditions affect appraisals, and understand that no analysis is perfect.

If you want to dig deeper, we encourage you to take action:

• Enroll in our real estate licensing course to gain more in-depth market analysis skills.
• Contact us for a free consultation to discuss your real estate career goals.

By staying informed, you can make smarter decisions and stand out as a trusted real estate professional.

Love,

Kartik