The Steroid Era of Real Estate

When observing the local real estate market, most analysts and reporters consistently compare this year’s data to last year’s data, or this month’s data to last month’s data. This is a particular pet peeve of mine for many reasons, of which I will share a few.

First, the time period is too small. Would you really take much notice if a “professional” told you that we are in a Buyer’s Market because we sold fewer homes today than we did yesterday? Of course not. Obviously, that time period is too small to be useful. I maintain that months are too small as well. Years as a unit of measurement are better, but not too much, in my opinion. Small time frames simply don’t leave any room for natural fluctuations in the market.

Do we really expect the home sales market to go straight up? Or straight down? Wouldn’t it be more realistic to expect ups and downs along the way, much the way we all expect the stock market to behave? In the long haul, home prices will go up, but we are going to have patches of down times along the way, and comparing those down times to the best times only make the comparisons worse.

And that is my biggest complaint about the comparisons I see all the time in the newspaper as well as on TV. It is obvious that a few years ago, too many people were buying homes who shouldn’t have been. For whatever reason, people qualified to buy homes who would have never been allowed to buy in the years or decades before. That means that the number of homes sales during that time were artificially high, and are not true indicators of the local activity.

Just as in baseball, when a player is found out to have cheated, and used steroids, their records are viewed with suspicion and some even have asterisks placed next to them. Why not do the same for real estate? Why do we insist on comparing 2008’s real estate records to those that were “juiced” with mortgage steroids that should have never been administered? Wouldn’t it be more honest to compare last year’s statistics with a year before, say 2004, when truly qualified buyers were the norm and not buyers who were virtually guaranteed to file for bankruptcy? Or maybe we would be better off comparing this past years statistics to a running average of the past five or ten years, to get a better idea of how 2008 really stacks up?

As a quick example, I looked at Louisville, Kentucky, a normal mid-western city. I believe the results give you a better idea of where 2008 really stands. The number of sales made in 2008 was 71% of the average over the past 10 years. Bad news anyway you look at it. However, the average sales price in 2008 was 105% of the past 10 year average, probably a bit better than most would expect. And finally, the median sales price in 2008 was 107% of the past 10 year average!

By looking at how 2008 stacked up against a running 10 year average, we can see that the news is a bit more nuanced than the national media would have us believe. Yes, there is bad news out there for the home seller, but its not all bad. If we just make honest comparisons, we’ll see that many home sellers will actually end up better in 2008 than they would have in any other year!

Greg Fleischaker is a Associate Broker and Realtor in Louisville, KY, where he consistently ranks as one of the top salesmen in his office. In addition, Greg has developed a reputation for expert knowledge of the statistical breakdown of his local market, and has been repeatedly quoted in the largest daily newspaper as just such an authority. To learn more, and to receive Greg’s free real estate newsletter and monthly sales statistics, please visit Greg’s personal website, http://www.GregFly.com. You may also contact Greg directly at greg@gregfly.com.