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How do I know if the market is appreciating or depreciating?

Dani Fleming

Dani Fleming, the principal of MA Properties, has been involved in real estate for many years...

Dani Fleming, the principal of MA Properties, has been involved in real estate for many years...

Oct 29 8 minutes read

Most people believe that the governing factor of whether we are in an appreciating or depreciating market is the buyer pool. They believe that when we are in a depreciating market there are no buyers, and when we are in an appreciating market there are lots of buyers. In fact, there are the same amount of buyers regardless of what type of market we are in. I'll explain why this is the case; the governing factor of which type of market we are experiencing is inventory levels - the state of inventory levels in a town correlates tightly with supply and demand in that town.

Buyer Pool

To demonstrate the buyer pool concept imagine this scenario: most of you are not in the market to buy a laptop - some will be possibly thinking about it, some will be doing some research on laptops and what you can buy for the money, and others are not looking because they are just happy with their current compute technology. You can say the same thing about buyers in the property market - some are wondering whether they should buy, some are actively researching properties and some are just happy where they live currently (and their investment portfolio) and are not planning on buying right now - so we have similar driving forces for both the laptop and homes, albeit differing price points. Now, if I offer my laptop for sale for $3000 most of you will not change your plans and will say "No, don't want it and I'm not ready to buy it now". But, if I offered my laptop to you for sale at $1 then I would anticipate that I would be beseiged with offers to buy it. But, the same amount of people were offered my laptop for $3000 as were those that were offered it for $1 - yet I would get a totally different buying response from the same buyer pool.

Nothing changed but the price of the item, yet we had a markedly different activity profile. The buyer pool remained the same, just the perception of value within the buyer pool changed. When buyers see value in a product at the price it is offered for sale at, it stimulates a buying decision.

Supply and Demand

Have a look at the following diagram.

Its all about supply and demand. Consider the above situation as a period of time. For the top situation we have 4 new houses coming onto the market, and in the same period of time we have 9 houses going under agreement and being no longer available to buy. The net result is reducing inventory levels for that period of time. If this continues over an extended period of time then inventory levels decline. When we have fewer homes on the market, then buyers are willing to pay higher prices for those homes to ensure they can buy them. In this situation, home prices will go up because of reduced inventory levels, or lack of supply of homes to buy.

Now consider the next scenario - 6 homes coming on the market, and in that same time frame 3 homes are sold and go off the market, giving a net increase in inventory levels for that time period. If this continues we have increasing inventory and this creates a negative price pressure on those homes on the market. In this situation home prices go down because there are more homes for buyers to choose from, and for a home to stand out 'from the crowd' they need to drop their prices because of the increased competition from other homes as a result of the increased inventory levels.

In a general sense, we can consider a trend occurring when we have the same situation occurring for 3 months or more.

What type of market are we in now?

The type of market in many of the towns in the northwest quadrant of Boston, out to Route 95, is a definitive appreciating market. Most of the towns within Route 95 have severe shortages of inventory and when a home comes on the market realistically priced, then there are competing offers on the home, and the home has an accepted offer on it within days of coming onto the market. Sellers know that if they are getting competing offers on their home that they are getting the maximum price possible for their home. Often this is over market value because once competing offers occur on a home then emotion takes over and buyers will pay more for a home than what they would if the home came on at a price that did not generate multiple offers. We see this time and time again. If a home comes on the market at a higher than market value price, then the home will sit on the market, accumulating days on the market, and not selling. When it finally sells it will sell for far less than what it would have if it had come on the market at the right price - the only benefit to anyone is that the agent has gotten some very valuable, and free, marketing by having the sign sitting in the front yard for months on end. This is not in the best interests of the seller!

Competing offers are not just happening in lower price ranges, but they are occurring across all price ranges in the towns within R95 in the northwest quadrant if they are realistically priced due to the shortage of homes on the market.

This can be validated by the graph below of Sales to List price ratios shown below for Lexington (other towns can be found on our website under Statistics). The red line across the top of the graph measures the percentage the sales price was to the list price. You can see that currently Lexington is running at 100%, or a little more, over the last 6 months. It is a little more complex to use the Sales to List price ratio to identify trending information as there is a 6-10 week delay in the data. This is because this graph is showing what homes have sold for compared to their list price, but each home actually went under agreement 1-3 months ago.

Another validation point is how quickly the homes go under agreement. A home that goes under agreement within 4-5 days of coming on the market has possibly had competing offers on it which is an indicator of the strength of the market without waiting for the home to close in a couple of months.

When you head further out from Route 95 toward Route 495, you find that inventory levels are still fairly typical of recent years and there are not severe shortages of inventory occurring in these towns. We are seeing much smaller percentages of homes selling for over asking price in these towns because we are not seeing dramatic shortages of inventory.  We generally see towns that are a longer commute distance to Boston sliding into a market downturn sooner than homes closer to Boston, and then coming out of the downturn later than those closer to Boston.

If you'd like to chat more about these statistical pieces of data and how they relate in the real world of real estate, then please don't hesitate to contact me.

If you would like an estimate of what your home would sell for in today's market I would be more than happy to come by, have a look at your home, and then provide a CMA (comparative market analysis) which will provide you with an estimate of what your home should sell for, along with a marketing plan to get maximum exposure for your home. 

If you have any questions about any of this then please don't hesitate to reach out to one of us. We would be more than happy to help.

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