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Three Cents Worth: Sitting and Spinning

[In this week's installment, Jonathan Miller, a chartist and a real-estate artist, examines the interplay between two elusive and potentially elucidating real-estate stats, time on market (represented by the blue line) and listing discounts (red bars). Data on this graph runs from the first quarter of 1997 to the second quarter of 2005.]

What's really interesting about this chart is that it provides a nebulous suggestion that the rate of price appreciation may ease in the coming months. However, this conclusion is far from certain, and factors like falling mortgage rates might prove it wrong.

The chart displays Days on Market and Listing Discount, two of the least-used tools for measuring the strength of a real estate market, primarily because the information is so difficult to obtain.

First, some definitions:

* Days on Market: The number of days from the last change in list price to the contract date. If the property is priced above the competition, it's going to sit.

* Listing Discount (Negotiability): The percentage difference between the final list price and the contract price. In soft markets the Discount tends to grow, and in tight ones it tends to shrink.

(More on terminology and standards for measuring a real estate market here.)

These two indicators have to be used in tandem since one doesn't tell the story without the other. For example, if an apartment is over-priced, it's going to sit longer than the norm and require more negotiation from the seller. We measure from the the last list price change since that's the point at which the apartment entered the market. If a property was worth $1M at the time of its listing and was priced at $2M, it really isn't a listing until it approaches its value.

In early 2003, we saw a spike in the average days on market and more negotiability in price just before the commencement of the Iraq war. In short, the market softened. Since then, as the real estate market strengthened, both indicators have trended downward.

For perspective, the listing discount has fallen further than the average days on market since 1997. There might be a floor that the average days on market can not fall below in this market, say 80 days. At the same time, the listing discount or negotiability has approached zero. In fact, we estimate that about 1/3 of all listings sell above list price, 1/3 sell at list price and about 1/3 sell below list price. That's a tight housing market.

However, in the first half of 2005, both indicators have shown a little weakness, yet prices are still rising. Does that mean the market is slowing, or is this just a blip in the data? We'll have to measure future sales to know.
· Listing Discount v. Days on Market [Miller Samuel]
· Three Cents Worth: Apartments, Upward! [Curbed]
· Three Cents Worth: Manhattan Condos and Co-Ops [Curbed]