How is the market?  What is the market doing?  What will the market be like in 6 months?  Is the market going to keep going down? These are just some of the questions we get asked every day by our clients, our prospects, friends and acquaintances. 

It is a question we need to be able to answer without hesitation and with conviction because the answer to this question if done correctly can lead to higher close rates and more business.  So how do we figure out what is happening in the market?  Being that we are just one little agent in a sea of thousands in our markets, our activity is not a large enough sample to draw from.  We must be able to analyze the marketplace with the data we have available to us.  Now this might seem overwhelming especially if you are not an economist or a statistician, but I'll show you that it is easier than it seems.  There are really only two variables to the market question:  SUPPLY and DEMAND.

Let's first look at DEMAND.  This is the pool of people that are in the market to buy a home.  They are looking to make a move in the next day or the next year.  The problem is we don't know when they will buy, they don't know when they will buy, and they can change their mind at any second.  Analyzing demand is very difficult.  Therefore, trying to answer the question of what is the market doing from the demand side is not usually the best way.  In the last 4 years there have only been two times that the activity of the buyers was so clear that we could use it to talk about the direction of the market.  One was when interest rates hit 35 year lows and the Fed had dropped rates 14 or 15 straight times.  The other was right after Hurricane Katrina hit and gas prices went through the roof.  In my market place, you could sense the increase and decrease in demand caused by these two events. 

That leaves us with SUPPLY.  This is the inventory of available homes that are for sale at any point in time.  This is a very easy number to determine and one that we will use when answering the question of market conditions.  We can go to the MLS and search for Actives for a geographical area and it will tell us how many houses are for sale and available to be bought.  This is SUPPLY.  Now we all know there are FSBO's for sale that aren't in the MLS and in some areas of the country New Homes are inventory that is not reflected in the MLS.  But for our purposes, as long as we always use the same search criteria, we will have an apples to apples comparison and a strong starting point.  But it is only a starting point.

The number of homes for sale is just one number and by itself has no relevance, so now we need to put it into context.  Is the current supply more or less than last week, last month, last year?  If you haven't kept track of the actives in your market and have the information readily available, you are going to have a problem making the comparisons and establishing what the trend is.  I would suggest doing so now.  I can tell you how many homes were available for sale at the end of each month for the last 3 years but that is because I created a spreadsheet and update it weekly. 

If you don't have the number of actives, you can try and recreate it from the data in the MLS or you can see if anyone else was keeping track.  Usually the local associations have a database of statistics although it probably won't be broken down for the exact area you want.  Nonetheless, looking back at this data can give you an idea of what the market was like in past years. 

In lieu of the actual actives data, we can do a quick search of the database for a certain time period and establish whether the inventory was increasing or decreasing and to what degree.  The way to do that is to do a search of all homes with a list date of a certain time period, for instance January 2006.  You want all homes that had a list date of that month, regardless of the current status.  This includes solds, withdrawn, expired, actives, etc.  Then do a search of all homes that have a contract date of the same month.  Only solds.  The difference between these numbers will be the net increase or decrease in inventory during that period.  Doing this for each month or quarter will give you a good idea of what the supply was doing during that period.

So now we have some concrete information in which to intelligently discuss the current condition of the marketplace.  To put it into context I will use the data from my market, Ashburn, Virginia, to give you an idea of what I am seeing from the numbers. 

First, the current number of homes for sale not included new is 407.  The number of homes for sale at the end of December 2006 was 383.  This tells me we have had a slight increase to the inventory during the first half of January.  Looking closer at the number I find out that there are 62 new listings since January 1st and 31 re-listings, offset by 63 sales.  This is an interesting discovery and one very few people will ever know.  Even though our inventory has increased in the last two weeks, the entire increase can be attributed to homes that relisted.  Homes sold and new listings are virtually equal. 

Next I compare last years numbers to this years numbers.  On January 16th, 2006 there were exactly 389 homes for sale.  Also very interesting given the incredible roller coaster ride the last twelve months, we are at virtually the same place from an inventory standpoint as we were last year at the same time.  

What does that mean?  I think it means that if we have another surge of homes and an increase to the inventory similar to the one last year, we should expect prices to continue down.  However, if the inventory stays at the current levels we should see some stability in prices and a return to a "normal" market.  That is, of course, if nothing crazy happens to the demand side of the equation. 

Hopefully this will help you out the next time someone asks you about the market.