The real estate market is fluid, constantly in motion, waves crashing upon the shore and gently receding back to the sea. It is self-sustaining, part of an economic system designed to keep society as we know it humming along. The problem is, when attempting to find opportunities in the current market, we are looking at past data. We can use predictive methods to interpret the future based on where we have been, but this is far from a perfect method. So, how do can we, as professional experts, determine the current state of the market for our clients?
I like to use a method called “Triangulation”. Like the GPS system on your phone and car, triangulation utilizes multiple reference points to determine your precise location. And we can do the same thing in the real estate market!
Where We Have Been
This is the most common reference point used by appraisers to determine market value. It pulls from previously sold home data over the past 180 days to dictate the subject property’s “appraised value”. Most folks who have sold a home before are familiar with this method — it is what we the industry call a “CMA”, or Comparable Market Analysis. Perfectly fine for its role, but when we are looking at something as large as the real estate market it doesn’t capture the whole picture.
As part of the process, we need to know where the market has been recently. This will be our baseline of value to interpret which way the scale is sliding. If 3 Bed, 2 Bath, 1800 square foot ramblers are going for $350k and selling in under 30 days on average in a local town over the past six months, we can use this against the current market position for reference.
Where We Are Today
Utilizing this metric is fairly straightforward — take a look at all the homes currently active on the market within a specific segment and run the numbers. Let’s say the same size homes that had been selling for $350k are now available on the market for $350k — a reasonable assumption if you were to use a CMA alone — but has sat on the market for 90 days. This is past the anticipated timeline, and often means demand has softened in an area.
The market can, even at a large scale, be interpreted entirely on a supply/demand calculus for most homes outside of the luxury market or truly unique properties. A way to test the theory — see if the entire market is experiencing an increase in days on market relative to the price, or if only a specific subset of the market has slowed down. As an example, maybe a builder has homes sitting on the market for extended periods of time, but the existing market is still operating at the previous days on market. It is important to balance perspective; correlation does not necessitate causation, as they say.
Where We Are Going
This step requires the most time, and is a separator between the best agents and brokers from the rest. It requires a look at the outside forces applying pressure to the market — interest rates, unemployment, changes in presidency, stock market values, new businesses opening in town, local factories shutting down, changes in zoning ordinance, adjusting tax rates, pending municipal improvements, natural disasters, immigration or emigration of residents — the list goes on.
Each of these external factors impacts the supply or demand of a region. If a hundred homes are being built in a town where there are usually fifty existing home transactions, we would see a supply shortage if two-hundred first time homebuyers want to move into town to take advantage of, say, remote work tax credits. And if demand outweighs supply, price will tip in favor of sellers until the market balances itself out again naturally.
Bringing It All Together
Let’s see how this plays out in real life. In the Minneapolis metro, we have nearly a 7-year run of declining inventory. When coupled with immense demand thanks to Covid restrictions and low interest rates, this led to a ravenous buyer pool for a nearly two year run where home values surged. In recent months, in part thanks to doubled interest rates, the market has settled considerably. This was a healthy and inevitable adjustment back towards the mean, but it has left many wondering: is it a better time to buy or sell?
Looking at where we have been, the baseline median sale price for a typical home in Maple Grove, Saint Michael, and Elk River? Right around $400k, with a bit of variance between each town. The days on market was 9 at the beginning of 2022, which has steadily risen to 14. This is a lagging indicator, and provides our starting point. We are using multiple cities in growth markets to help hedge against any anomalies.
Looking at currently active homes on the market, we can discern a few trends. First, the days on market is noticeably higher. We are currently sitting at a median 51 days on market — this is more than triple where we had been. Despite this, we the median price to buy a home in these markets? $497,000. This number is usually higher as list prices are not the same as sold prices, but it is telling how large of a gap there is.
The most unusual piece of data? When looking at the Saint Michael and Elk River markets, more than 50% of all available homes are newly built or being built right now. This means there is significant supply in new construction, which presents an opportunity for those looking to get the best bang for their buck. In the opposite direction, acreage properties (anything with an acre or more) make up a very small percentage of each given market. In Maple Grove and Saint Michael, they make up less than 6% of the total available homes and demand a roughly $100,000 premium relative to the median home.
Now, where we are going — this is where knowing your local market really stands out, as it won’t be the same from one town to the next. Maple Grove is pretty well built up, and the majority of remaining new construction is over $1,000,000, driving up prices of everything else. Thanks to its position along the freeway system, unmatched number of amenities and highly rated school districts, businesses have flocked to this mecca of retail and created an environment where folks want to live.
On the other side, some larger forces are applying pressure as well — while interest rates have doubled since the beginning of 2022, we have seen them begin to slide in recent months. The job market remains strong, though there have been such waves of layoffs at large companies as they adjust to increased costs of doing business. This has placed downward pressure on demand as supply remains historically low, and has hampered new construction in particular as their prices are often lagging as well due to the time it takes to get a home from dirt to closing.
Where Does This Leave Us Today?
While supply is still historically low, it is up significantly from where we were a year ago. Homes are sitting on the market longer, and new construction in particular has a wealth of available inventory currently and on the way. Outside forces such as interest rates are applying downward pressure on demand. Prices remain up from where they were a year ago, but have slipped slightly in the past few months.
We are heading towards a balanced market, one we haven’t seen in many years. To those making a move in 2023 this means hiring a talented negotiator will be increasingly important to ensure no money is left on the table. Buyers, expect to see more options and explore new construction if the budget allows. Sellers, competition will increase with multiple homes on the market nearby. Acreage properties continue to command a higher price due to their low supply.
There is opportunity in any market. Be aware of your surroundings, work with your real estate professional, and find the value. In a shifting market, rolling with the tide and keeping your eye on the horizon will keep you level and pushing towards your goals.
“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger–but recognize the opportunity.”
― John F. Kennedy
