Monday, December 11, 2006

Market Analysis Methodology

Since I refer to "my analysis" or "what I'm seeing in the MLS data" from time to time, I thought I'd take a minute to explain what data I'm collecting and what I'm doing with it.

How is it possible to keep track of everything that's happening in our local real estate market when there are multiple counties in the state, multiple cities in each county, multiple neighborhoods in each city, multiple subdivisions in each neighborhood...?

I pull statistical information from the MLS system each week, then analyze it in an attempt to understand exactly what has happened, and hopefully to predict what will happen. I try to download enough data to draw meaningful conclusions, but not so much that I don't have time to do any analysis (I need to keep time available to service clients!) I decided awhile ago to pull data from 5 cities across the northern part of the Valley: Surprise, Peoria, Glendale, Phoenix, and Scottsdale. This gives me a diverse mix of: west/east, new/old, city/suburb, expensive/inexpensive, growing/stable, etc. I think these 5 cities give a good representation of the overall Valley - there isn't anything going on in Gilbert, Chandler, Tempe, Buckeye, Litchfield Park, or any other suburb that is going to be completely out of line with these cities - rapid growth, new residential & commercial development, older neighborhoods competing with new construction, etc - they're all covered.

Next, I'm careful to pull the same set of information everyweek. It doesn't do me too much good to know there are 7,300 houses actively for sale in Phoenix. I need to know how many there were last week, last month, and last year to give this some relavence. I'd also like to know how the number of Sold houses looks compared to the same time periods, etc.

Then I run all sorts of calculations on the numbers, such as: Avg # of Sales per day, Avg # of Expireds per day, Avg # of Sales per Expired, Days Inventory, Avg # of Days on Market, Avg square footage, List Price vs Sold Price, and more.

Finally, I look at the results of these formulas, in isolation and as a group, both for each city and as a total. It's possible that one number is trending one way for a particular city but the other way in total. It's possible that one number says one thing by itself but says something different when taken with other numbers. For example: last week marked a 6-week trend of Days Inventory going down (albeit by a very small percentage). This would normally be good news; the market demand is soaking up the excess inventory, and balance should ensue. However, further review shows the Days on Market is increasing, the # of Solds per Expired is decreasing, and the Avg Sales Price is flat. This doesn't look like a strengthening market to me; it looks more like some of the sellers have given up (either via canceling or letting their listing expire). They would still like to sell, but have decided to wait until later, which means the long-term supply hasn't really decreased.

I also compare my hard facts, statistical analysis with my more subjective, gut-feeling based on what I'm seeing with and hearing from my clients, just as a double-check. When the smoke clears and the dust settles, I have a pretty good idea of what's going on, and have been able to help my clients act accordingly.

-Chris