. . . and Its Impact on Buyers and Sellers.
I am hearing the term “new normal” when describing the current real estate market. The market during the past three years from the height (June 2006) to the bottom (May 2009) could not be called “normal” because it was changing so fast we didn’t have time for it to be normal. Prices were declining at a rapid pace. Foreclosures and short sales were increasing at a rapid pace and unemployment was doubling.
So, if you are buying or selling in this “new normal “ market, what can you do?
The answers are found in the market statistics. Analyzing data is critical for pricing no matter if you are selling or buying a home. PRICING MATTERS.
Figuring out the "new normal" market
Housing is Local
First, realize market conditions are extremely localized. When you hear stats on the national news, these are nationwide numbers. Meaning our numbers are lumped in with Florida, Nevada, California and then we get an average. Which, considering those markets, is much higher generally than what we are experiencing here locally? However, Naperville is holding up much better than say, Plano, Aurora, or Oswego. Why?
In marketing, many products like to have a niche. It is what makes something special, unusual from the norm. The same is true in real estate. In Naperville, it is the school system which makes this city desirable. Therefore one of the first things you must evaluate is the niche the home is in. Is it the home’s location? The schools? The finished basement when there are few others?
Foreclosures Are Not Going Away Soon
Second, are distressed sales affecting your home’s value? This again, is much localized. Certain towns in the Fox Valley area are being affected by distressed sales more than others. Given the current trend in the number of foreclosures, these same communities are going to be feeling the effects for a number of years yet to come. And we all know what a detrimental effect distressed properties have on real estate values.
Stats You Can Use
Third , are stats that provide information providing direction to prices. “Days on market” or DOM is valuable both to one home as well as to the market as a whole. You do not hear much at all about this statistic but is crucial in understanding local conditions. DOM is the number you get from calculating how long a home and/or homes in a certain local have been on the market. It is an average.
A general rule of thumb is the market changes every 21 days. So are you seeing price reductions every 21-30 days from a seller? This can tell you a lot about the motivation of the seller.
Another good stat is the “inventory absorption rate”. Think of it this way:
A grocery store has boxes of cereal on its shelves. This is the store’s inventory. The store’s goal is to sell these boxes of cereal before buying any more. The grocer would like to know how long it will take to sell this inventory at the current rate of sales.
To get this stat, the grocer uses past information to calculate how many boxes he sold during a month. By knowing he sells for example, 30 boxes per month, or one per day, and there are 240 boxes of cereal on his shelf. The inventory absorption rate is 8 months. Meaning it will take him 8 months to sell his entire current inventory.
Now just insert homes in place of cereal and you will get the absorption rate for homes. Rule of thumb is a number less than 6 months is a seller’s market and anything above 6 is a buyer’s market.
Therefore we now have what is called the “new normal” market:
- Stable home prices but well below the high of the market, causing many homeowners to still be “underwater” on their mortgage
- Foreclosures in the 1 to 1.25 million range
- Unemployment 9-10%, which is double the rate during the Bush years (approx 4.5%)
