There are a number of real estate market indicators which can be used to define current market conditions, as well as predict the future direction of home prices. These include sold market times and months of inventory remaining, which have been previously mentioned on this blog.
This time, we wanted to spotlight the sold-to-list price indicator, which compares the sold price of a home to its listing price. There are two versions of this indicator which can provide further insight into the current market condition: the ratio of the sold price to the original list price and the sold price to the last (most recent) list price.
The concept behind this indicator is that home sellers typically price their homes above what they hope to get, with the idea that the overpricing will leave room to negotiate downward. Over time, this gap has averaged between 3% to 5%.
Figure 1 shows the two series for Los Angeles County with the inference that the two track one another quite closely in strong markets but can look quite different in weak ones, as seen in the 2008 to 2011 period. In weaker markets, it is common for sellers to reduce their listing prices if they are not getting activity or offers. Note that both ratios are virtually the same presently, which is further evidence of the strength of the market with, remarkably, homes selling at or even above original listing prices.
As previously mentioned, this indicator is also an excellent predictor of future home prices. Figure 2 shows the sold-to-original list price ratio plotted along with the annual percent change in the median single-family price for LA County. As seen, this indicator has been highly correlated with the price change with a lead of about one to two quarters.
Figures 3 and 4 show the same correlations for Maricopa County in Phoenix. Another attribute of this and other market-based indicators is that they can be applied on any geographic level or for different property types. Figure 4 shows the two series for one of the ZIP codes in Scottsdale, AZ.
By using market measurements such as the sold-to-list price indicator, we can get a clear view into the exceptional status of the current environment: homes selling for at or above asking price are a good sign of a very strong seller’s market. It is worth noting that the recent increase in mortgage rates should cool down this aspect of the market somewhat, the effects of which we will continue to monitor at Black Knight.