Hello, I am new to the forum, but I wanted to introduce myself. I think the analysis that is going on here is GREAT, and I am happy to share some of my observations.

I wanted to begin with a topic that concerns me, and that is the representations that are made concerning market times for RE sales. These market time numbers are drawn from the MLS, and they are calculated by counting the days from the day the listing goes active to the day that it is marked pending. This has some built-in problems which leads potentially to grossly underestimated market times. I will explain.

Several years ago, when the market was brisk, a home would be listed and would go pending. Market times were very accurate in the brisk days. However, today, a home may be listed for 90 days and expire. It is relisted a second time for 90 days, and it expires. It is relisted a third time, and then goes pending in 37 days. Reported market time is 37 days, NOT 90+90+37. In a buyer’s market, multiple listing periods occur due to a variety of reasons: extended sales time; change in realtors; withdrawal from the market to make improvements, etc. Consequently, in the market that we are in right now, the method for computing market times can grossly underestimate REAL market times.

In addition, in the current market, homes will go pending under a contingent contract. In many cases, the home WILL sell, but many, many more months later because the buyer’s home must go into escrow first. In this case, having a home that has a market time of 47 days, but doesn’t close for 4 months creates, in my opinion, some distortion of what that number means. Again, the calculation is mathematically correct, but it just doesn’t reveal to consumers what is really going on in the market.

WHAT IS A GOOD ALTERNATIVE?
The alternative that we use in our practice is MONTHS OF INVENTORY. We take the number of sales for the past 6 months and divide it by 6; this gives us the average monthly sales. NOTE: It still doesn’t account for market momentum (which in the current case is declining), but it is, at least, a decent number, and at least it is based in reality.
OK, so now we have average sales rate. THEN we simply take the current inventory and divide the inventory by the sales rate to get months of inventory. If this isn’t clear, let me use an example. Let’s say for a particular zip code in a particular price bracket, 90 homes have sold in the past 6 months. 90/6=15 homes per month. In the same zip/price bracket, there are 150 homes currently for sale, that means that there is a 10 month inventory (150/15).

What I like about the months of inventory approach is that you can see how different price brackets in different areas are faring. I’ve run the numbers for many areas in North County, and there are some clear breaking points. In most of the coastal areas (Oceanside, Encinitas, Carlsbad, etc.), the inventory for any bracket under $1M is under 10 months, usually around 7-8. Above $1M, things begin to soften (e.g., Encinitas goes to 16 months of inventory above $1.25M), but, for the most part, things are delayed but not in a crisis situation.

HOWEVER, if you compare the months of inventory to the inland markets, things change pretty dramatically. For San Marcos and Escondido, the over $1.25M price bracket yields around THREE YEARS of inventory. That number is GROWING because the sales rate has, since March, declined for the most part.

I’d be interested to hear what some of the other participants think, but I do not consider a 3 year inventory level to be a stable situation. I don’t have the historical data, so I can’t compare the current numbers to the early 1990s. But, if you have 3 years of inventory, AVERAGE market time is going to be 18 months. I think many sellers cannot wait 18 months, and the easy solution is to slash the price. If the historical cycle occurs this year, inventory will continue to climb and sales rates will continue to fall through Q4. If that occurs, and the Months of Inventory in market segments goes to 48 months or even more extreme times, I think we are likely to see a correction in those market segments. I don’t think we will see a significant correction in those micromarkets that remain at a health inventory level because…well…those market segments are healthy.

I have the numbers for most areas in San Diego county except east county. If anyone wants other data, I can post it. Let me know.

I hope this little piece has been of use to your group, and I look forward to contributing in the future.

John Hokkanen
Hokkanen Real Estate Team
http://www.SurfTheTurf.com