by Dirk Zeller
Before investing the couple of hours a month building your own marketplace analysis, check to see if your local board of Realtors or MLS compiles market trend reports. I have found that most do something on this order but are not as comprehensive in price ranges. They do mainly geography-based reports for all price points. You need price segmentation.
If the essential data isn't available, set a couple of hours aside and construct the analysis on your own. We need to use the following formula to gain accuracy of the trends in the marketplace.
1. Segment your marketplace geographically.
Our objective is to view the macro and micro of your marketplace. The macro would be the marketplace or whole and even broken down geographically. The micro is the price segmentation we need to do as well. You could also break your areas out via school boundaries. Many Buyers make their decisions on areas they will live based on school district or high school. The broader view works well to gain a flavor for the marketplace. The close-in view on specific market areas will be used heavily in showing properties to clients.
The easiest way to create segmented market areas is through using the existing MLS geographic regions. Most real estate statistics and data is already segmented in that format. Another option is using the areas as featured in your newspaper's real estate classified ads, as long as it works with what is considered standard marketplace knowledge.
2. Segment your marketplace into five price segments.
While most people, Real Estate Agents, and the media view the marketplace as one entity (or even a couple, based on geography), that is too narrow of an approach. Price plays a significant factor as well. Once we decide on a geographical area or segment, we need to segment via price point. We need to segment our marketplace into five key price segments: entry, low middle, middle, upper middle, and upper. Each one of these segments can be vastly different from the other.
Our Sellers and Buyers want to know the overall wealth of the marketplace. What they really want to know about is what's happening in the specific marketplace they are trying to buy or sell in; the only way to convey that to them is through price point comparison.
3. Know your available inventory levels.
All markets are influenced by inventory levels. The inventory levels in turn affect the percentage of homes that sell every month. The higher the inventory, the lower the percentage of homes that sell monthly. Another term used for the percentage of homes sold is listings sold versus listings taken ratio. In a normal or neutral market, the listings sold versus listings taken percentage will run 65% to 70%. In an inventory short, robust, high level Seller's market, the number will be well above 90%. We need to know the level of competition Sellers and Buyers will face based on the marketplace inventory levels.
4. Determine the number of sales in the last thirty days.
Now, realize I didn't say sold or closed properties. I said sales or pending sales. We want an accurate analysis for the previous thirty days. If we count closed transactions, we are really reflecting the marketplace inventory from thirty to sixty days ago, not one to thirty days ago. A property that closes, for example, on June 30 was really a pending sale in May or April, depending on the typical time in your market to complete the paperwork, inspections, appraisals, repairs, document writing, and all the other behind-the-scenes work for closing. We always want to reflect the activity from one to thirty days ago.
5. Calculate the absorption rate or the number of months of inventory.
This last calculation is the lynchpin of the whole analysis. It is where most people fall short in terms of marketplace knowledge. You need to take current inventory levels in each price point and divide that by the pending sales for the month. This will give you the number of months of inventory left if sales remain constant. We are also making an assumption with this calculation, which is that no new available homes will come on the market before the entire present inventory is sold. We all know that assumption is false. We do see the best-case situation of the market.
As an example, you have 100 homes for sale in the entry level price point. There are twenty that sell, on average, every month. You clearly have five months worth of inventory left. A Seller will need to be competitively price to be one that will sell next month. What you are doing with this calculation is providing a clear picture of the current supply and demand mix in the marketplace.
Let me share another example. If there are 300 homes for sale in a given geographic area with thirty of them pending this last month, divide 300 by thirty and end up with ten months.
In contrast, one of my clients in southern California sent her market stats from over year ago. They showed ninety-eight properties available with 176 pending on a monthly basis. That's quite a bit different and more robust marketplace than one with 300 actives and thirty pendings. One has ten months worth of inventory, and one has about two to three weeks. The strategy, tactics, and counseling of the clients would be very different for these two marketplaces. One is a "list at all costs" type of marketplace; the other is "you'd better secure the listing at the right price." The Seller has to be informed, or you are wasting your time.
- Which market allows the Seller greater control?
- Which market do you think is appreciating faster?
- Which marketplace inspires the greatest Seller greed?
- In which market will homes spend fewer days for sale?
- In which market do Buyers have the least control and the greatest need to meet Seller demands in order to make the purchase?
- In which marketplace do the Sellers put more pressure on Agents to cut their commission rate?
The marketplace with only two to three weeks of inventory is the correct answer to all these questions. The other marketplace is behind on all counts.
The trends of the marketplace are predetermined by the inventory of listings, pending sales, and number of months of inventory. Your marketplace will not magically go against the grain of the law of supply and demand. The key is knowing what the law is saying about it. Don't leave your office without your monthly analysis!
When you have a strong market trends report, you will be able to do a number of strategic things that add value to your prospects and clients. You will be able to send something that is truly an item of value to your past clients, sphere, and anyone else on your mailing list. This report should include at least the current numbers and should be sent out quarterly. You are giving your clients an update as to how their investment is doing. You're giving them a clear picture in case they want to sell or buy another home or make an investment purchase.
When you send this market trends report, underneath the numbers, write a couple paragraphs of analysis on what is happening in the marketplace. Then write a paragraph of call to action at the bottom of the page. The call to action could point out the opportunities in the marketplace. You might highlight a new property you just listed and ask if they know of a Buyer for it. There are unlimited calls to action.
You can also use the newfound knowledge to secure prospects over the phone and in person. With this knowledge, you can position yourself as the expert in the marketplace. Use your knowledge to inject urgency, reveal motivation, and convey your market knowledge. For example:
- Were you aware that we have only about 3 weeks of inventory in the price range you want to buy in?
- Did you know that we had 22% appreciation in the marketplace last year? This same home would have been almost $50,000 less a year ago. You could have bought it for $225,000 last year instead of the $275,000 now. I wouldn't want you to waste another $50,000 by waiting until next year! Would Wednesday or Thursday this week be better for us to meet?
- Have you been told that a well-priced, great condition, solid location house is only lasting three days on the market right now?
We are trying to use our knowledge to secure our appointment through building our credibility. We need to open the door through our knowledge and close for the appointment quickly.
Using key marketplace knowledge and statistics is really an easy way to build credibility and trust. It sets you apart from the other Agents. It increases the desire a prospect has of wanting to meet with you. Your clients will listen to your counsel more attentively, and more importantly, they will actually do what you counsel them to do.
Published: October 2, 2009
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