Where does the Buyers Market end and the Sellers Market Begin?

Comment by Diane Cohn on April 16, 2008 at 12:17pm

Victor, these are my initial thoughts and others can add to the conversation...

In Reno-Sparks, I think the market turns when get somewhere between 6-12 months of inventory, 90 days on the market, and the median price? That's a hot topic on my blog right now... but I almost want to say 4x the median salary for the area ($46,250) plus 20% down which I think works out to $231,250, which is lower than the $235,000 prediction that my contributors are currently debating.

This is a low number, and I'm sure no one wants to see it happen, but it would bring prices in line with salaries that don't seem to be rising anytime soon. The low end of our market is moving better than any other segment, but last I looked the under $300K category still had 13 months of inventory at 131 days on the market.

Notice of defaults and foreclosures keep rising in our area which will need to be absorbed by the market, so it will take us some time here in Reno to get back into balance.

Comment by smarten on April 16, 2008 at 1:15pm

I have a bit different take Victor [I'm sure you thought I would]!

DOMs - This is an irrelevant figure for a couple of reasons. First, the only properties that go into the figure are those that actually sell. Given this totals about 5% of all properties on the MLS, who cares? I'm far more interested in the number for the other 95% of listings whose DOMs [I'm sure] are probably off the chart. Second, agents have a way of gaming the system to hide the fact that a new listing is really not new. Thus the true DOM numbers need to be extracted from a whole lot of research - something you can do on a one-on-one basis, but not included in the "official" number.

Median Prices - All depends upon the number of homes that are actually selling. If you're coming out of a low [as we are in Reno/Sparks], the pool of sales from which the median is drawn is so small a sample that IMO, it's irresponsible to start making any conclusions based upon the median in a vacuum.

Prices/Square Foot - This is annother marginally beneficial benchmark IMO. As Diane told us in her RGJ article last Sunday, buyers don't care what it costs to build, or what sellers spend upon upgrades [or square footage for that matter]. All they care about is getting "a good deal."

Inventory - I think this is a very important number, and it is directly retlated to the number of listings that actually sell. So for instance in January of 2005 there were 2,078 listings on the MLS, and 381 [over 18%] sold. Last month there were nearly twice as many listings [4,099], yet only 235 [5.7%] sold. You can see that if we were back to only 2,078 listings, even with today's depressed number of sales, we'd have a very respectable sales/listing ratio [over 11%]! So I say, current inventory is key.

Cost to Rent/Cost to Purchase Ratio - This to me is another important piece of data and you WON'T find it on the MLS. Take your $2M Montreux listing for example; figure the loss of return on a 20% downpayment; figure the mortgage costs on an 80% loan; add your taxes, insurance and homeowners' association dues; and you'll end up with a number. Now compare this number to fair market rent for a home like this [probably about $3,300/month (residential rents are not high in this market because there aren't a lot of people making a lot of money they can spend on rent)]. When the ratio is below 30% [which it is in my example], there's very little incentive for the renter to become a buyer; especially in a declining market. Now if that ratio were over 60%, there would be a whole lot of incentive.

So in conclusion, two figures. The number of homes listed for sale, and the cost to rent/cost to own ratio.

Comment by Victor Lund on April 17, 2008 at 4:45am

So if I understand these two answers correctly....

Diane believes that the buyer's market ends and the sellers market begins when there is a balance between household income and housing affordability.

Smartin believes that the buyer's market ends and the seller's market begins when it becomes more beneficial to rent than to buy.

Did I get that right?

Comment by Diane Cohn on April 17, 2008 at 7:59am

I think both are key.

Comment by Victor Lund on April 17, 2008 at 11:28am

Both answers seem to predicate the concepts of buy vs. rent for first time home buyers. What about those of us who already own a home with equity or have enough saved to justify a larger down payment.

How does a home owner time the market?

Comment by smarten on April 17, 2008 at 1:26pm

Victor asks, "how does a home owner [who wants to sell] time the market?

The same way as the buyer [and I disagree with your observation it makes more sense for the first time buyer to buy vs. rent in today's declining market]! What do I mean.

If you already own a home and want to move up, DON'T sell your home. Just buy a replacement and become a landlord. If you "have enough saved," use your savings to double down. If you don't have enough saved but "already own a home with equity," refinance so you can pull some of the equity out and use it to double down. Then when demand and prices increase, you can consider becoming a seller.

In the meantime the rental market is strengthening [did you see the piece on this subject on the KOLO 8 news this morning?]. Even if you have negative cash flow, the tax benefits [i.e., depreciation] should put you close to break even. And even if it doesn't, whatever remaining negative reduces your other income subject to taxation.

Good luck!

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