Beware Of Misleading Real Estate Statistics

Dec 26, 2018

Beware Of Misleading Real Estate Statistics Cordon Real EstateMisleading real estate statistics are not always easy to spot, though they appear frequently in real estate advertising and are commonly used in negotiating real estate sales. Most are not intended to mislead, they appear simply because they are readily available and have become accepted without putting much thought into whether they provide an accurate picture of the market or the value of a specific property. Let’s take a closer look at three common misleading real estate statistics that, whether we’re buyers or sellers, we may want to question or simply ignore.

Let’s start with price per square foot. This is a one-dimensional measurement in a multi-dimensional universe. It does not take into consideration several important value variables, such as the size of the lot or a spectacular view not available to other homes in the neighborhood. It also does not say anything about allocation of square footage within the home. Insurance companies like this information so they can estimate replacement costs of the structure, but for home buyers the value is not a reliable way to compare properties.

Mark Twain lies

Listing Price Versus Sale Price is a statistic often used to indicate demand for homes in a town or neighborhood. It compares the listing price (published asking price) to the sale price (actual purchase price) after a sale is completed. The statistic is often expressed as a percentage: “Three bedroom homes in beautiful Bella Woods sold for an average 43% above asking price last month.” Great concept, but misleading in practice. Most reading this statistic assume that sellers are setting the listing price equal to market value. If homes are selling above market value, demand must be strong. If homes are selling below market value, demand must be weak. The problem? Few homes are listed for sale at market value. There are two popular listing strategies that dictate not listing a property at market value. The first strategy is to set the listing price below market value to attract a greater number of potential buyers and generate multiple offers. The objective is to create a bidding war that drives the sale price above market value. The second listing strategy is to set the listing price above market value to pull up the amount potential buyers offer. Buyers may not offer the artificially high listing price, but the strategy is successful if buyers offer more than market value. Setting listing prices low or high occurs under any market conditions, so it’s hard, most often impossible, to know if individual homes and neighborhoods overall have listing prices set high or low. For this reason, listing price versus sale price is not a reliable measure of market conditions.

Days On Market is another statistic that is often confusing and misleading. In general, the number of Days On Market (DOM) refers to how long a home is offered for sale before an offer is accepted. A home with a high DOM might be considered to have problems. The seller may have over-priced the home or there could be physical problems the seller isn’t willing to fix. But these reasons are not always true. The home might be fine and the price has been set at market value, however, if demand slips during the listing period the home may remain on the market longer than normal.

Price range can also have a big influence on DOM. Homes priced within a community’s average or affordable range are likely to sell faster than homes priced in the luxury range. The simple reason is because there are more active buyers looking at homes in the average range than in the luxury range. Here in the San Francisco Bay Area, there are several fine luxury estates on the market priced $30 million and up. Buyers in the that price range historically do not come along within the typical marketing period for average homes in the communities where those estates are located. Buyers should consider price range before judging a property based on DOM.

Another confusing facet of DOM is the use of Cumulative Days On Market (CDOM). Sometimes sellers will cancel the sale of their property for a period of time if DOM gets higher than average and appears to be driving buyers away. They put the property back on the market at some point in the future, resetting the DOM back to zero with the new listing. Most multiple listing services (MLS) have implemented policies to counter this tactic and increase visibility into a home’s sales history. The first was to require the home to be off the market for a minimum period before DOM is reset, typically six months to a year. The second was to report sales history going back further than the time required to reset DOM, perhaps for another year or two (DOM and CDOM reset periods vary based on local MLS policies). CDOM equals DOM for the current listing plus DOM from all previous listings within the MLS’s CDOM reporting period.

Confusing? It can be. Buyers should, therefore, focus on location, price, features and condition of the property and not worry too much about these statistics. Misleading real estate statistics shouldn’t get in the way of buying the perfect home at a fair price or implementing effective strategies to sell your property. Use only those statistics that are accurate and provide information applicable to your transaction.

Have questions about real estate statistics or other aspects of real estate buying or selling? Drop me a line!

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