Before investing the couple of hours a month building your own marketplace analysis, check to see if your local board of Realtors or MLS compiles market trend reports. I have found that most do something on this order but are not as comprehensive in price ranges. They do mainly geography-based reports for all price points. You need price segmentation.
If the essential data isn’t available, set a couple of hours aside and construct the analysis on your own. We need to use the following formula to gain accuracy of the trends in the marketplace.
1. Segment your marketplace geographically.
Our objective is to view the macro and micro of your marketplace. The macro would be the marketplace or whole and even broken down geographically. The micro is the price segmentation we need to do as well. You could also break your areas out via school boundaries. Many Buyers make their decisions on areas they will live based on school district or high school. The broader view works well to gain a flavor for the marketplace. The close-in view on specific market areas will be used heavily in showing properties to clients.
The easiest way to create segmented market areas is through using the existing MLS geographic regions. Most real estate statistics and data is already segmented in that format. Another option is using the areas as featured in your newspaper’s real estate classified ads, as long as it works with what is considered standard bazar marketplace knowledge.
2. Segment your marketplace into five price segments.
While most people, Real Estate Agents, and the media view the marketplace as one entity (or even a couple, based on geography), that is too narrow of an approach. Price plays a significant factor as well. Once we decide on a geographical area or segment, we need to segment via price point. We need to segment our marketplace into five key price segments: entry, low middle, middle, upper middle, and upper. Each one of these segments can be vastly different from the other.
Our Sellers and Buyers want to know the overall wealth of the marketplace. What they really want to know about is what’s happening in the specific marketplace they are trying to buy or sell in; the only way to convey that to them is through price point comparison.
3. Know your available inventory levels.
All markets are influenced by inventory levels. The inventory levels in turn affect the percentage of homes that sell every month. The higher the inventory, the lower the percentage of homes that sell monthly. Another term used for the percentage of homes sold is listings sold versus listings taken ratio. In a normal or neutral market, the listings sold versus listings taken percentage will run 65% to 70%. In an inventory short, robust, high level Seller’s market, the number will be well above 90%. We need to know the level of competition Sellers and Buyers will face based on the marketplace inventory levels.