Making Sense of Supply-Demand Data In Real Estate
The (un)official start to the Spring Market began last Monday with some data that was potentially even more surprising than the record-breaking number of offensive yards gained the day before in the Super Bowl. Those hoping to buy a home in the Twin Cities this spring had 34% fewer homes to choose from than one year ago, and about 50% fewer than two years ago. If it seems like in some hot price points and areas there are practically no homes for sale, it may be because, essentially, that is the case!
Example: Say you are a buyer looking in a swath of the uber-popular Lake Nokomis/Lake Hiawatha area, generally the majority of Hale/Northrup/Bankcroft/Keywadin neighborhoods in the price range between $225,000 and $300,000. Well, there is 1 active listing on the market, and 16 houses that have gone under contract in the past 30 days. Clearly, not an easy market for buyers.
The Seller-to-Buyer Ratio
Realtors look at the number of active listings and the number of homes sold in the past 30 days to quantify an estimate of how many sellers there are compared to how many buyers there are in any given market. Of course we can’t really know how many buyers are actively shopping and ready to write an offer at any given moment. So we look to the last 30 days to create a good estimate. This estimate of the number of current buyers is what economists call a “lagging indicator” because it relies on something that already happened. But because our MLS data is fairly complete and timely, it makes for what most in the industry consider a pretty good indicator, and I would agree. Using these numbers, we are able to estimate a market segment’s current “seller-to-buyer ratio.”
The industry considers a balanced market to have between 4 and 5 sellers for every buyer. In other words, a seller-to-buyer ratio of somewhere between 4:1 or 5:1. So in a given segment of the market such as the one referenced above, if 16 homes had gone under contract in the last 30 days, there would be an estimated 16 buyers per month. That means if the market were balanced, there would be between 64 and 80 active listings. But in the micro-market we defined above, there is only ONE active listing, thus an estimated ONE seller for every 16 buyers, which translates to an extremely inverted seller-to-buyer ration of 1:16 . Folks that is what you would call a red-hot seller’s market of historic proportions. So where you hear a real estate agent say that now is a good time to sell, you can see there is supporting evidence that can be quantified (assuming they know their numbers and aren’t just broadcasting fluff).
This explains how a so-so recently flipped 900 square foot rambler with only 2 small bedrooms on the main floor just sold for more than 10% its original list price in multiple offers. Or a very small 1 ½ story with a very awkward kitchen, unfinishable basement and practically no closet space anywhere sold in less than 24 hours in roughly the same manner. It is important to add that these homes showed beautifully with their updated finishes and colors (and in the case of the rambler, pretty good staging too – the entire main floor was furnished). The ones that show well comprise the bulk of the success stories, while ones that are thrown on the market and not really prepared to show in their best light still tend to sit longer and/or generate less successful sales prices for their sellers.
Let’s look at a few more “micro markets.”
Another hot market this past year has been St. Louis Park. In one typical neighborhood in this city, it seemed like overnight, relatively nice 900sf ramblers went from selling for typically about $240,000 to suddenly fetching prices around $280,000 last summer. Right now, for buyers looking between $250,000 and $300,000 in St. Louis Park there is 1 seller for every 4.4 buyers. Bump up from $300,000 to $350,000 and it barely moves… 1 seller for every 4 buyers. What about $400,00-$500,000? A LITTLE looser—1 seller for every 2 buyers.
Staying with the $400,000-$500,000 price range, what happens when you go out a little further into the suburbs? Minnetonka has just 1 seller for every 2.2 buyers. Plymouth gets a little better–1 seller for every 1 buyer. A little further… Maple Grove—much looser at 1.9 sellers for every buyer. It’s getting tighter though–a week ago it was 2.5 sellers for every buyer. Chaska and Waconia sport just 1 seller for every buyer in this price range, while Shakopee has 2.3 sellers for every buyer and Prior Lake has 2.5 sellers for every buyer.
Folks, this is what I believe is the SINGLE MOST IMPORTANT metric in real estate—the seller-to-buyer ratio is also sometimes referred to as the “absorption rate,” by the way. And, you are starting to see how we don’t have just one “Twin Cities Real Estate Market,” but rather many, many market segments, sometimes also referred to as “micro-markets,” and it really doesn’t matter what the “Twin Cities Real Estate Market” data is saying. To understand how your property or any particular property fits into that market, it’s the MICRO-MARKET that property lies in that matters. ALL things real estate are LOCAL!
And how many “micro-markets” are there in the Twin Cities? Hundreds? Maybe thousands?.
Let’s just look at a couple more. We’ve been bumping our way up and up in price range. So let’s look at $600,000 – $750,000 seller-to-buyer ratios. This time, let’s look at it by school district, because sometimes that is more relevant to segment property data by schools than by city…
Minnetonka Schools: 3 : 1
Wayzata Schools 2 : 1 (tons of new contruction here, too)
Osseo/Mpale Grove Schools 9 : 1 (wow!!! 19 active listings at the moment). Imagine if you were a person who lived in Edina, or maybe near Wayzata with an older, updated home with an established, larger lot, and were thinking of moving up to Maple Grove. You think now might be the time to strike!?!?
Eden Prairie Schools 6 : 1
St. Louis Park Schools 3 : 1
Edina Schools 1.3 : 1
So there you have it—I hope this gave you a new appreciation for gauging real estate markets. If you or anyone you know may be thinking of a move soon and would like to get a micro-market analysis from a top listing agent please contact me today and let’s schedule a conversation. I am here to help, let’s knock it out of the park together!
Yours in all things real-estate, Tim