Six Signs That Sales are Softening

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Last year was not a great one for the housing economists who forecast home sales.  Most, include NAR[1] and Fannie Mae[2], predicted that existing homes sales would end up south of a 3 percent increase over 2015.  In fact, sales did a little better, rising 3.2 percent for the best sales year since 2006.[3]

This year, experts are low-balling sales even more.   Realtor.com has existing home sales rising only 1.9 percent this year[4] and Fannie Mae has them rising only 1.8 percent[5].

The good news is that these are predictions for the fictitious “national” real estate market and may have little or nothing to do with what happens in your local market.  It’s not unusual for a third or more of local markets to go the opposite direction of the “national” market trends. The primary reason you should take notice of the forecasters is to correct the expectations of your clients and customers who read the headlines and may expect the worst this year.

Much less local data and market analysis exist at the local level than the national level, though there is much more available today from MLSs, trade groups, data providers and local media that there was just a few years ago.  Anticipating in advance when sales and prices will rise and fall at the local and hyper-local levels still more an art than a science.

Here are six signs that sales may be softening in your local market.  They are less scientific—and less accurate– than the databases, algorithms and repeat sales indices used by economists to formulate national forecasts.  However, when two or more of these signs appear in a given month, it could be cause for alarm.

Chronically low local inventories will always cut sales.  Real estate is all about supply and demand.  When there are fewer houses to sell and demand is average or better, prices rise and properties sell faster for a while. When prices are too low, as they were in 2007 to 2013, fewer houses coming onto the market is a good thing because the current level of demand will lower total supplies and prices will rise, encouraging more sellers to list, and they sales will rise.  In today’s markets, however, demand is stronger and low inventories are forcing up price fewer houses to sell automatically translates into fewer sales.

Pay close attention to current active listings and new listings in your MLS.  February, March and April are the months when sellers traditionally replenish depleted inventories to reach buyers over the spring and summer season.   If inventories that are falling now were also lagging last year, you are witnessing a significant decline over two years or more that sure will result in low sales..  Sometimes low inventories early in the year drive prices up quickly.  Sellers quickly become motivated and conditions can improve by June or July—in time to salvage sales for the balance of the year after some damage is done.

Declining pending sales can be a barometer.  Not all markets report pending sales, which occur when a seller accepts a buyer’s offer but the house has yet to close.  Pending sales often differ from closed sales in the same month; about 15 percent of deals can fall through for a variety of reasons that may or may not reflect falling demand.  However, pending sales do give an indication of what closed sales will look like in the current month. You can easily compute monthly pending sales month.  You can get a feel for pending sales in a hyper-local market by keeping track of contracts within a Zip code or a community on a monthly basis.  Remember, seasonality will affect pending sales as well as closed sales, so a simple month to month decline may not be a cause for concern if you are entering late summer, fall or winter markets.

Longer hyper-local days on market show activity is slowing. Today’s MLS and aggregator sites make it easy to search Zip codes and hyper-local communities and neighborhoods by sales and pending sales. If you subscribe to market data information from your MLS or vendors like CoreLogic or RBI, you can search by community or Zip Code to find current days on market and months’ supply data.  These data will vary by the season, so month-to-month comparisons may be misleading.  Get a year over year comparison by looking up days on market and months’ supply data from a year ago to determine how your market looks.  If houses are taking longer to sell or if the months’ supply is larger than it was last year, those are signs that demand is not keeping up with supply and sales may be weakening and you might experience fewer sales than they were a year ago.

Sale-to-list price ratios can be a tip-off..  When homes end up closing below their list prices, sellers are getting less than they hoped for their homes.  Either they are settling for offers below their list prices or buyers are successfully negotiating lower prices, which reflects diminished seller confidence due to flagging demand. Market reports from RBI, CoreLogic and other vendors provide sales-to-list ratios by county, city, Zip code even community or neighborhood.  Many buyers price their homes above market price in hopes of getting a windfall or strengthening their market position when negotiating with buyers. A list to price ratio of 96 percent or above, therefore, is a not a cause for concern and may be a sign that demand is strong.  However, when sales to list ratios fall into the low 90s or 80s and should decline continues for a month or more, you probably see an early sign that demand is waning and sales will falter when sellers resist the pressure to cut prices.

Buyer traffic creates buzz.  The rise and fall of buyer interest in a local market or hyper-local market can be detected in several non-scientific ways that can give you a “feel” for what’s happening.  In recent years, researchers at the National Association Realtors have experimented with lockbox data that records home showings.   NAR also publishes a Traffic Index within its monthly Realtors Confidence Index report that gives a feel for buyer and seller traffic based on reports from Realtors participating in a monthly survey.  I’m not aware of any MLS or local lockbox data from Supra or Sentrilock, but if local market data on showings could be aggregated and released at the local level, it would be a very helpful indicator.  If you work in a large brokerage or network with other agents, you can take the temperature of local buyer traffics by keeping track of open houses and showings.

Price reductions are hard evidence.  Every local market has a few sellers who get a little greedy and price their homes to far above market expectations.  When they cut the price 5 percent, they are simply facing reality.  When owners whose prices are close to market price medians start reducing prices, however, something serious is going on.  Sales usually fall before widespread price cutting occurs, so price cutting is not an early indicator but a final confirmation that demand is not strong enough to maintain current price levels and sale will suffer until price corrections occur.

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