The Cromford Report has a chart (below) called Contract Ratio–a
simple algorithm for taking the market pulse each month–from slow to
normal to hot. Mike Orr defines Contract Ratio this way:
Contract Ratio indicates how “hot” a market is.
It specifically measures the number of completed sales contracts
relative to the supply of active listings. It is defined as 100 x
(Pending Listings + Active Listings with Contingent Offer) / Active
Listings Without a Contingent Offer. The higher the number the greater
the buying activity relative to supply. If this number rises then it is a
sign of growing contract activity and a positive signal for sellers.
Conversely a falling number is a sign of a weakening market – either
supply of active listings is increasing or contract activity is slowing,
or both. In a balanced market for normal market segments, the value of
the Contract Ratio is usually between 20 and 40. When it lies below 20
the market can be considered “slow” or a “cold market”. Above 40 can be
considered a “hot market” and when it moves above 100 we regard this as
evidence of a “buying frenzy”. In high-end luxury market segments the
normal level is lower, usually lying between 15 and 25.
What this graph says is that the current market, averaging all
activity in ALL price ranges, is a very hot ‘buying frenzy’ Contract
Ration score of 114. While trending ‘cooler,’ still very much in the
‘buying frenzy’ zone over 100.
No doubt the slight cooling trend is a function of at least 3 major
factors that have been amply discussed elsewhere—diminishing supply of
distressed properties and the rapid appreciation in those lower-end
market sector. There’s a seasonal component as well.
The less publicized story is what is happening in the mid-range to
high-end, luxury property segment. We have speculated in earlier blog
articles about the ‘trickle-up’—that rising prices and fewer underwater
homeowners creates a demand for mid-range properties…’trickle-up.’
In other words, upward mobility follows. There are other factors as
well, like the increasing availability of financing at continuing record
low rates, et al.
For the purpose of this article, let’s apply Mike Orr’s
Contract Ratio formula to the mid and upper-range properties for a
snapshot of where we are today in the luxury sector.
Using his formula, mid-range homes (between $400K and $800K) have a
Contract Ratio of 40. Looking back at his definition—a normal / balanced
market being between 20 and 40, the contract ratio of 40 looks pretty
good. Especially when we factor in that a normal / balanced market in
the luxury sector is between 15 and 25.
Looking specifically at homes over $1M the Contract Ratio is
currently 14, or ‘slow.’ Even so, luxury specialists will be quick to
point out that the ‘best of class’ luxury properties, when priced
‘right,’ are absolutely selling.
With all of the above in mind, it is fair to say that both investors
and owner-occupant buyers may do well to direct their attention
especially to the mid-range. Here we find that the bleeding has stopped.
The market is stabilizing.
When we look at asking prices in a market with low inventory, prices
are on the rise. Pending sales and closed sales have yet to show a
significant appreciation trend, but this may well be where a significant
investment opportunity lies.
Another mid-price range indicator is the Number of Month Supply. In
Scottsdale, where the average sales price is just $497K, there are
currently 462 active listings. In that same range there have been 1045
closed sales in the past 6 months, or a market absorption rate of 174
per month. If we divide 174 into 462 we get a number of month supply of
less than 3 months! Note: A 6-month supply of homes is considered
balanced. Below 6 months favors sellers and explains why mid-range
prices in Scottsdale are on the rise–about 5% year-over-year (comparing
the average closed $ Sq/Ft over the last 6-months with the same period
in 2011).
For buyers of mid-range properties the message might well be that the appreciation train has left the station.
From Moody’s Co-founder and Chief Analyst Mark Zandi comes
this: ”We’ve clearly reached a key psychological shift in home buyers’
psychology, where folks are now starting to worry about missing the
boat, rather than fearing whatever house they buy, no matter how
attractive the price, can only go down in value,”
Time to jump on board?
