Price it right, at the right time.
The sales comparison method is the most practiced way of predicting the value of a residential property. It’s a compare apples to apples approach: if you’ve got a 4 bedroom, 2 bath colonial with 3,000sqf, you’d find similar 4 bedroom, 2 bath, 3,000sqf colonials in the same area as a basis of comparing and predicting the price at which your property would sell.
Not to down play the work of agents; there’s another layer of fine-tuning to the above before deriving at a number. Factors like age, amenities, interior finishes, curb appeal etc should all be considered, but broadly, that’s the gist.
Until February this year, the sales comparison method is one that I’ve relied heavily on when pricing residential properties.
Then Jason Linscott of Residential Mortgage Services opened my eyes to another level of pricing strategy and reading the market.
And frankly, it blew my mind away.
Absorption rate and hot market factor
First things first - definitions. Boring, but necessary.
Absorption Rate is the rate at which homes are sold in a specific market (e.g. Boxborough) during a given time period (e.g. 12 months).
In a typical year, how many apples are brought in to a supermarket in Boxborough, and how quickly do they sell? (PS, I’d snigger if you say none, because there are no supermarkets in Boxborough.)
If you’ve got data on the apple-eating habits of the neighborhood, you’d know if there is an excess of apples on the shelves. You’d also know that you could probably increase the price of apples and still have people purchase it because they need their apple a day and there’s a shortage in the market.
The second, is Hot Market Factor. Jason used a more elegant term, called the Pending Ratio, but I’ve butchered it and used Hot Market Factor instead because it’s easier to connect. Hot Market Factor is about the speed in which homes get under contract once they hit the market.
How quickly are people grabbing those apples?
Slight difference between Absorption Rate and Hot Market Factor.
Absorption Rate has a broader overview on available inventory and the expected selling rate of them. Say you’ve got 3 types of apples going- Honeycrisps, Gala and Pink Lady. You know that Honeycrips are the most popular, and based on their absorption rate, you’d have to restock them every other week. Gala is the second favorite, those need to be restocked in 3 weeks’ time. Pink Lady gets restocked every other month.
Hot Market Factor tells you by which time of the day your apples are depleted from the shelves. For an equal number of apples per type placed on shelves, Honeycrisps are fully sold by 2pm, Gala are sold by 7pm and Pink Lady are sold by 9pm.
These are all demand and supply metrics, so why did they blow my mind?
Because previously, I only knew how and what to price a home based on sold examples.
I now know how pace a dynamic market, and when I should be making price adjustments. Sweet!
data on boxborough
Data extracted from the MLS as of 15 April 2019. 15 April 2018 - 15 April 2019 represents the past 12 months.
* Excludes foreclosure properties.
I’ve adapted an excel that Jason so kindly sent into a table of my own above. The beauty of such a table is that it allows you to focus on a price range and glean a more precise interpretation of the market.
Cells in green imply a seller’s market; taken to be less than a 6 months’ supply of homes, or more than 50% hot market factor. There’s more demand than supply; sellers have an advantage in negotiations.
Cells in yellow imply a transitioning stage; between 30-50%, it could swing to either a buyer’s or seller’s market.
Cells that are not filled imply a buyer’s market.
I’ve added alphabetical labels in red in order to explain the terms.
Interpreting Absorption Rate
(A): Homes sold per month, is the monthly absorption rate. In this example, I’m looking at single-family homes that are priced between $500,000 - $600,000. There were 7 homes sold in that price range within a period of a year, from 15 April 2018 to 15 April 2019 (the date I looked at the MLS and pulled numbers). Based on past data, the absorption rate is 0.58 sold homes per month.
(B): Months supply represents the amount of time required for current available homes in the market to be sold. Given 2 homes on the market, past year’s data implies that an absorption rate of 0.58 is equivalent to 3.4 months for both homes to be sold. Still, a green cell - from a macro year’s perspective, it’s a seller’s market in that price segment.
Taking a pause, what does past year absorption rate data show?
If your house is listed at $800,000 or higher, as a seller, you do not have upper-hand in negotiations. If there is urgency to sell your house - and if it makes sense - consider pricing it at $799,000 to be in the seller’s market.
Interpreting Hot Market Factor
The Hot Market Factor is about the speed in which homes get under contract once they hit the market.
(C): Hot Market Factor is ratio of pending homes to all available inventory. In the single-family $700,000 to $800,000 segment, of the 5 homes listed on market, 4 got under contract and are pending a sale. 1 remain. That’s 80%! Seller’s market; you snooze you lose.
The $700,000 to $800,000 range seems to be Boxborough’s sweet spot. Above that, you’d get into yellow cell mode - a transitioning phase - a likely reason due to competition from Acton, Concord and Carlisle.
Data on Acton
Alright, knock yourself out. :)
Data extracted from the MLS as of 15 April 2019. 15 April 2018 - 15 April 2019 represents the past 12 months.
* Excludes foreclosure properties.