A brief history of local real estate, part 6: bid.
Let's see who's been paying attention. Which real estate market indicators have we discussed so far, class?
Good. Another, please.
"Sales?"
Right. Any others?
"Uh, inventory? Days on market?"
Yes, and...
"Something weird called absorption?"
Lucky guess. Which brings us to our final indicator, bid. Bid is the average amount, over or under list price, that homes sell for during a certain period. Bid is an interesting but, it might seem, narcissistic indicator. What's the point of quantifying bid except to admire or put down the market in retrospect? "Boy, that was a hot market!" Or "Boy, that was a lousy market!"
Bid's seeming limitation is that it's not a leading, predictive indicator: it can't be known until after the smoke's cleared, sales for the period have closed and sales prices are known. And once you know sales prices, what else do you need to know?
Well, for one thing, it's mighty interesting to know that in early 2000, bids in some price ranges averaged as much as 33 percent over list. Yes, that's right, during the height of the dot-com boom, homes in the most sought-after neighborhoods sold for an average of a quarter to a third over list price. And they weren't cheap neighborhoods.
Which tells you what was in the local air and maybe drinking water back in March 2000: optimism and then some. Overbids like those haven't happened since, not even in 2005. Kinda puts the two booms in perspective.
So I like to think of bid as a snapshot of homebuyer confidence or even exuberance, or the complete lack of same. Nothing quantifies the state of buyer confidence at any point better than bid. Usually.
The following chart shows average bid for five local real estate sub-markets since April 2000.
We can see that all five sub-markets track each other through thick and thin, at least to a point. The chart also tells us that buyers in some sub-markets have been consistently more optimistic or aggressive or focused or whatever you want to call it. Midrange SFR buyers have been particularly motivated, I think largely because they've often been competing for their homes, and competing for that gold standard, the single-family home, and competing for single-family homes in gold-standard neighborhoods known nationally and even internationally for their quality of life. So does this mean that top-end buyers are pessimists, or that the neighborhoods they buy in are less desirable? No, it's just that, even in this area, there aren't that many people who can afford $2M or $3M homes, and their numbers dropped sharply after dot-com stopped turning journeyman programmers into millionaires.
Now let's see if there's a correlation between bid and sales price, and whether bid is fated to always be a lagging indicator, never able to tell us where the market is going. First, let's look at the local low-end SFR sub-market. Percentage of over- (or under-) bid is on the left axis, sales price per square foot on the right.
So much for bid not being a leading indicator: bid drops well before sales prices do, in late 2000 and mid 2005, and starts rising (admittedly, out of a deep hole) months before prices start to recover in early 2009. However, one thing to know about low-end SFR bid is that until 2007 it wasn't at all unusual for what looked like an overbid to actually be funds given by the buyer to the seller to credit the buyer for closing costs. In other words, buyers were sometimes or even often using overbids to partially or completely finance their closing costs. But I still think that, even at the low end, bid gives us an accurate picture of homebuyer confidence, albeit with a grain of salt.
Next, let's look at midrange SFR, where overbids have always been good clean upstanding overbids and never seller credits in disguise.
Much the same story, at least starting in 2005. Note that buyers hit the market hard in fall 2004 and spring 2005, hard enough to sustain prices even though buyer "excitement" diminished quickly except for brief (and typical) flurries in spring 2006 and spring 2007. Even spring 2008 managed a noticeable if relatively subdued uptick in bid, although for the right house and neighborhood the excitement was anything but subdued.
Also note that bid is an honest reflection of rising prices in early 2005, 2006 and 2007. Some people claim that agents manipulate bid to make the market seem hotter than it is. Like most amateur real estate analysis, this has a kernel of truth. Yes, you'll get impressive overbids, and lots of them, if you price a home at 90 percent of market value. The problem with this theory in the real world is that sellers, not agents, set list price, and sellers are often reluctant to under-price their homes, either through fear of leaving money on the table—although no seller leaves money on the table when thirty buyers compete for his home—or because the seller is more willing to price his home above market value than below.
And for that matter, any market indicator can be "easily manipulated" by the agent community. Want to make the sales numbers shine? Then price every home right, and present it well. Want to juice sales price? Then price every home right, and present it well. Want to make days on market sparkle? Absorption? Even inventory? Then price every home right and present it well. Simple. In theory. And so difficult in execution, at least for so many agents. And another perfectly good conspiracy theory bites the dust.
Finally let's see what top-end SFR can tell us.
In this price range there's been remarkable symmetry in the crests and falls of bid and sales price. Which tells you that bid is a typical market indicator: sometimes it can help you crack the code, and sometimes it can't. And it's hard to tell which is which.
In two weeks, the grand finale: we see if rises and falls in absorption, my favorite indicator, can help us predict rises and falls in sales price. I've always assumed that absorption can, but never put it to the test. Which means that in two weeks I'll be working without a net. Which reminds me of the saying that a trial attorney should never ask a question of a witness that he doesn't know the answer to.
So who knows? Maybe in two weeks I'll need a new favorite indicator.
In two weeks, A brief history of local real estate, part 7: conclusion.