What are the best indicators of a recovery for the real estate market?

real estate market statisticsIn a recent article by the Alabama Center For Real Estate (ACRE) it was reported that January 2012 residential home sales in the state of Alabama were up 17.6% from a year ago (2011).  This announcement followed up the news that 2011 saw an increase of 2% over 2010.  Great news, right?

Of course any increase is positive, but there are also some other indicators other than number of sales that appraisers look at when they study the market.  In addition to sales volume it is important to look at absorption rate, active inventory, months of housing supply, median list price of active listings, days on market, and sales price to list price ratio.  That’s a lot to analyze, however by looking at all of these indicators together we can get a good idea of the health of the market.  While a look at the larger picture can be helpful, it is at the neighborhood or subdivison level that you can really see obvious trends.  Each area and property type will have their own characteristics.

I’ve talked about absorption rate on my “A Look At The Absorption Rate In Pelham, Alabama, Pt. 1” blog post.  By looking at the rate at which homes have sold in the past, and then comparing it to the current number of active listings, you can tell how many months of inventory you have.  The longer the months of inventory, the longer it can take to sell your home unless it is priced competitively.  An absorption rate from 0-3 months indicates a sellers market and anything over 7 months reflects a buyers market.   Historically, anywhere from 4-6 months is in balance.  It’s important to remember that these indicators are dependent on each other.  For example, the number of current listings and past rate of sales, will determine the months of inventory.  Days on market is a measure of how long it took for the home to sell from date of listing to date of contract, and it is affected by supply and demand.

The next set of indicators also work together to give us an idea of what is happening.   The median list price of active listings, listing days on market, and sales price to list price ratio mirror market health.  If the median list price of active listings is lower than the median sale price of recent sales it tells you that the market is starting to be saturated with homes and sellers are lowering their asking price to meet the increased supply.  An increase in days on market shows that demand is decreasing and it is taking longer to sell.  The sales price to list price ratio measures the difference between what the home was listed for and what it eventually sold for.  I have found that in a healthy market this figure is in the 95-97% range.

This post is not an in depth study of market statistics but rather a brief introduction to what appraisers look at to determine how a market is performing, and if it is on its way to a recovery.  What other things do you see as being good indicators of a recovering market?  Please leave me a message below, I would like to hear what you have to say.

If you have any real estate appraisal related questions you can call me at 205.243.9304, email me, or connect with me on Facebook., Twitter, or Youtube.

Comments

  1. Nice job, Tom. It’s never about just one number – especially an encouraging one. We need to sift through many bits of data to understand what is happening in the market.

    • So true Ryan. I see a lot of people ignoring very important indicators that may not be performing so well and then posting some of the others that are postive. It has to be looked at as a combination of the data to get a true picture. I do think there are a lot of good signs of an iminent recovery, but only time will tell.

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