Everyone has an opinion on the real estate market. There is a surprising consensus on where the market is currently (it favors sellers) and less consensus on where it is going.
Every month I review the market stats for Los Angeles County and attempt to provide some guidance on how the market has changed from the prior month and prior year, both important benchmarks for determining if there is any change in the statistics that might be worth noting and may point to changes ahead in the market. For the most part, the story has been the same; declining inventory (number of homes for sale), rising prices, and fast sales (low days on market). But the last couple of months have seen changes in some of the data points that indicate some changes are underway that may slow price appreciation and result in a more balanced market between buyer and seller.
So I thought it might be a good time to review the statistical data points and explain them in greater depth.
When I review the market statistics I use a program provided by the Multiple Listing Service (MLS) called Infosparks. It is a tool that is easy to use and allows for a number of ways to parse the data points. I first have to select an area to analyze. For my monthly updates, I focus on Los Angeles County. It is a fairly large area. For example, there were over 16,000 homes for sale in June of 2018 in LA County, the City of Los Angeles shows only 2,600. I choose the larger sample size to give a broader picture. I also have to choose the property type. Here I limit my analysis to single family homes and condos, eliminating Income property and leased property.
Homes for Sale: This is the number of homes for sale on the market as of the last day of the month. This is the Inventory of the real estate market. Because there is not a lot of new construction in LA county, the number of homes for sale is directly related to people deciding (or being forced by circumstance) to sell their home. This factor alone, the discretion of the seller to sell or not, means the number of homes for sale is driven both by broader economic trends as well as the individual decisions of thousands of people living in LA.
Like much of the real estate market, there is a seasonality to the number of homes for sale; there tends to be the highest number of homes for sale during the summer, and the lowest during the winter holidays. That said there have been declines in the number of homes for sale, year over year for the past 4 years. The peak inventory in 2014 hit in July with 25,000 homes for sale. 2017 saw a huge drop to a peak in July at 19,500. In July of 2008, there were over 66,000 homes on the market. Of course, the market was beginning to tank at that point and prices dropped precipitously as homes did not sell. So keep that figure in mind. Inventory would have to grow by 400% before we see the same dynamics at play that caused the market crash in housing prices in 2008.
Closed sales: This is the number of homes sold during the calendar month. For June 2018 there were almost 7,000 homes sold in LA County. This represents almost half the inventory of homes for sale. We are seeing sales lag a bit from 2017 but over the course of the last 10 years, the number of homes sold does not change all that much; July 2008 saw 6,200 homes sold, the peak was in August 2012 with 7,500 homes sold. This fact supports the contention that the number of buyers in the market at any given time remains fairly constant, it’s the number of houses for sale that drives the most important data point: median price. The more inventory in relation to the number of buyers, the lower prices will go.
Pending Sales: This is the number of escrows that open during the month and ties closely with the number of sales. For example, there were 6766 pending sales in May 2018 and 6,911 closed sales in June 2018. This data point is a leading indicator that sales are increasing or declining.
Days on Market: This is the median number of days a home is for sale before an offer is accepted and the house goes into escrow. This is a very key data point as it shows that homes are selling quickly or slowly and thus if prices are rising or falling. For the past five years, the number of days on market is lowest in the summer and has been peaking between 17 & 21 days. Compare that to summer 2008 where the number of days on market was 50. Again look to days on market to tell you if the market is changing to favor buyers. Just like the number of homes for sale, days on market has a very long way to go before it reaches the time it took to sell a house during the height of the recession.
Month’s Supply of Inventory: This is the measure of how many months it would take for the current inventory of homes on the market to sell, given the current pace of home sales. For example, if there are 600 homes on the market and 100 homes selling each month, there is a 6 month supply of homes for sale. It is generally considered a Seller’s market if the Month’s supply number is below 6. Currently, in LA County, the month’s supply is 3.2 indicating it is still a solid seller’s market. The month’s supply in January 2008 was over 17 indicating a strong buyer’s market, and it dropped to a balanced level in 2010 and has been below 6 since January 2012. However, this past June, the month’s supply shot up from the prior month to 3.2. Look for this number to steadily rise in order to see a real change in the market.
Median Sales Price: The difference between the Median Sales price and the average sales price is important. The average sales price is all of the homes sold averaged out. This can inflate the numbers, particularly if there are a handful of homes that sell in the high 8 figures. The Median sales price is the sale price in the middle of the data set when you arrange all the sale prices from low to high. The median sale price, then, represents the figure at which half of the properties in the area sell at a higher price and other half at a lower price. In June the Median Sales price in LA County was $650,000. The average was $942,000. I prefer the median number as it seems more accurate in terms of what the market is telling us. The median sales price has been climbing steadily since it bottomed out in January of 2012 at $302,000, up 115%.
There are a few other data points I look at; the number of new listings, the price per square foot and the percentage of last list price. These data points can further refine the view of the market, especially the number of new listings.
These market specific data points tell the story of what is happening in the local real estate market. But real estate is driven by broader economic trends, and those data points, like average wage growth, the rate of inflation, interest rates etc. are more broadly tracked and can give some guidance on where the analysts see the direction of the real estate market going. But Like politics, all real estate is local. In a city or county the size of LA, there are trends in the market that are quite different than the nation at large, and certain areas in LA also have vastly different real estate markets. If you are thinking of buying or selling a property, it pays to understand the market. And when you are ready to hire a real estate agent to represent you, ask them about the market data, if they can’t speak intelligently about market statistics, it is likely that they spend more time counting their commissions than trying to understand where the market is heading.