How Big Of A Shift Are We Seeing?
Recently, buyer activity has gone down. We went from seeing 50-100 buyers on a property during its first week of showings, to seeing 15-30 buyers on its first week of showings. This is a significant drop in just a months worth of time. So, how significant of a shift is it? In order for the common consumer to understand what 15-30 buyers in the first week means, they will have to understand what a balanced market looks like…
What Does A Balanced Market Look Like?
In a balanced market, supply and demand is not leaning towards a sellers favor, nor a buyers favor. For many places like Long Island, NY, real estate has not been in a balanced market for the better portion of the last 4 years. For the last 4 years it has been leaning towards a sellers favor, with up & coming areas seeing more dramatic sellers markets than others. Due to the pandemic, the past year and a half has been overwhelmingly in the sellers favor as most of us know. In the past 4-8 weeks, Long Island’s market has experienced a drop in buyer activity, which has everyone wondering is the market going to level off, and what will this mean for prices? The key to knowing the impact in this drop in activity, is understanding where the balance point is. There are 2 key indicators to understand when talking about activity, and predicting what effects it may have on prices. An Absorption Rate, and Days on Market (DOM). Knowing these two points will help a consumer to make predictions of their own.
What Is An Absorption Rate?
An absorption rate directly measures how much inventory is in a given area, based on the rate at which that area sells inventory. For example: If a town or village averages 20 home sales per month, and that same town or village has a total of 40 homes available on the market, then that means that area has 2 months worth of inventory or a 2 month absorption rate. A balanced market typically has an absorption rate of 5-6 months worth of inventory. When an area starts to see more than 5-6 months worth of inventory, that’s when supply and demand starts favoring a buyer. When an area has an absorption rate lower than 5-6 months, and closer to the 2-3 months worth of inventory mark – that is when that market is favoring a seller. That is the number one indicator of a supply shortage in comparison to the demand. For the better part of the past 4 years, most markets on Long Island NY have been witnessing an absorption rate of 2-3 months, with some areas getting as low as 1.5 months of inventory (extremely low) in the past year and half due to the pandemic. Even though we have witnessed a drop in buyer activity, the absorption rate for attractive markets on Long Island is still around 2-3 months worth of inventory, however that is based off of last months data. In order to calculate an absorption rate, we need to know the rate of sale from the previous month which means we will not know August’s absorption rate until mid September. So with the absorption rate always being a month behind, a great way to see the most current up to date activity is to track the Days On Market (DOM).
What Are The Days On Market?
In New York, DOM is measured based on how long it takes a property to go Under Contract. When a property gets listed, first it has to get an accepted offer, then it has to have an inspection, then attorneys have to draw up contracts for the buyer & seller to sign. If it takes one week for a property to get an accepted offer, one week for a home inspection to get done, and one week for attorneys to draft contracts for both parties to sign – then that property would have been on the market for 3 weeks (21 Days On Market). A balanced market in NY will typically average 75-90 Days On Market. Through the pandemic, most properties including the overpriced homes have been going under contract in less than 30 days which is very very quick for the lengthy NYS order of operations. As of the past few weeks, we have been noticing more overpriced homes having to adjust their prices because buyers are not willing to pay them. That does not mean the market value has gone down on those homes, it just means that sellers right now can not list their homes for the “F” it price and try getting lucky. They need to price their homes more appropriately. Those overpriced listings that are not moving the same way are increasing the average DOM in areas where properly priced homes are still selling quickly.
What these two points are telling us right now is that on paper we are still in a sellers favor. However, there is one more point that is useful for a consumer to understand but is not measured on a statistics level. It only comes from being on the inside of the business, which is knowing the Showings To Offer Ratio, which can allow you to reverse engineer your way into predicting whether or not a seller will still have bidding wars, and how many offers they may expect to be fighting for their house at a given time.
How Will The Showings To Offer Ratio Effect Bidding Wars?
Typically, a properly priced home that doesn’t have major flaws, and is in a decent location can expect to produce 1 offer for every 10-12 showings on average. If a property is averaging 1 offer for every 4-6 showings, then that may indicate the home is either under priced, or it is an immaculate exceptional gem that is rare to find available in the area. Usually though it indicates the home is under priced, and the asking price is not accounting for its exceptionality. If a property is only receiving 1 offer for every 20-30 showings, then that means the home is overpriced, or it has unforgiving flaws either in its location or condition. If we assume we have a properly priced home, than a standard property should expect their showings to offer ratio to be 1 offer for every 10-12 showings. During the pandemic, some homes were experiencing 50-100 buyers in their first week, and it was common practice for every home to have 5-10 offers all over asking price within the first 7 days, with underpriced homes having upwards of 20-30 offers in its first week. Using the showings to offer ratio allows us to reverse engineer whether or not we can expect a bidding war and how much of a bidding war. If the common home is seeing 15-30 showings in its first week (including the open house), then we can expect the average properly priced home to receive 1-3 offers in its first week. That is exactly what we have been seeing right now with the recent drop in activity. This is where we tie-in what a balanced market looks like in comparison to what we have been seeing over the past couple of weeks.
As an agent with experience in balanced markets, I can tell you that homes will typically average 1-2 showings per week when the absorption rate is balanced around 5-6 months, and the DOM is balanced around 75-90 days. 1-2 Showings a week will take a home roughly 8-12 weeks to generate an acceptable offer. If we are currently seeing 15-25 showings in the first week, then that is another indicator that we are STILL in a sellers favor. It may not be 50-100 showings, but 15-25 is still a high rate of activity in comparison to a balanced market. These are the types of numbers we were seeing pre-pandemic, which brings us back to where we were before Covid-19.
Advice To Sellers In Navigating The Change In Market:
For my sellers, this means the “F” it number is no-longer going to work. You are going to need to have strategy around your listing price as well as a game plan. Make sure you are using a trusted expert or local top producer who has their finger on the pulse of your market at all times. A trusted expert will be able to advise you on the best pricing/marketing strategy to get the most amount of money for your home. If you hire the expert, and listen to them – they will make sure to put you in the best position to take advantage of the market conditions which are still in your favor. The best listing price always results in the best sales price. This will become much more important with the market shift than it was a few months ago.
Advice To Buyers In Navigating The Change In Market:
For the first time home buyers who are just starting out today, you may not have experience in the pandemic market, and you most certainly don’t have experience in a balanced market. When you are purchasing in a sellers market, you may feel like you are over paying – but the reality is you are paying market value. The best possible way to hedge yourself as a first time home buyer is to purchase the kind of property that can last you the longest amount of time. If you are purchasing a home that can only serve your needs for 5 years max, then I do not recommend purchasing that home. You are running the highest risk of getting caught holding the bag in the event you need to sell and an unexpected market down turn were to happen. You are running the risk of owing more than the home is worth especially if you are putting less than 20% down. If you purchase the type of property that can serve a growing family and perhaps last you 20-30 years, then do not worry about paying $25K over asking price. So long as you can afford the monthly mortgage, the 20-30 year home won’t force you to sell at the news of having another child and it will not matter whether or not you paid $400K or $420K. It won’t matter whether you paid $500K or $530K. In 20-30 years that home will either be paid off or close to it. That time frame is long enough to go through a complete down turn and still not only recover, but leave that $400K home worth $800K and that $500K home worth $1M. In only 15 years the market went from the worse collapse in US history, to one of the greatest markets in US history. As Warren Buffet preaches that the best stocks to buy are the ones you never have to sell, that same investing advise runs true with real estate. BUY AND HOLD! You will ALWAYS win in that scenario assuming you are not refinancing your home every 10 years (AKA purchasing your home all over again). Be patient. If you have a lower budget, either wait for the home that has larger bones but needs updating allowing you to grow into it, or wait all together until you can afford the long term home. If you have a larger budget, be patient until the long term home that fits your needs comes up. It will come. Be patient, and make sure you’re using a top producing realtor with experience.
It’s so great to know you are a writer that cares about the information you provide. This is smartly done and well-written in my opinion.
Thank you Samuel! I appreciate that!