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How's the Market - Real Estate Newsletters

Understanding the Market - Appreciating or Depreciating?

Most people believe that the governing factor of whether we are in an appreciating or depreciating market is the buyer pool. They believe that when we are in a depreciating market there are no buyers, and when we are in an appreciating market there are lots of buyers. In fact, there are the same amount of buyers regardless of what type of market we are in. I'll explain why this is the case; the governing factor of which type of market we are in is supply and demand - also described as property inventory levels.

Buyer pool

To demonstrate the buyer pool concept (as this is a difficult concept to explain) imagine this scenario: most of you are not in the market to buy a laptop - some will be possibly thinking about it, some will be doing some research on laptops and what you can buy for the money, and others are not looking because they are just happy with their current computer. You can say the same thing about buyers in the property market - some are wondering whether they should buy, some are actively researching properties and some are just happy where they live currently (and their investment portfolio) and are not planning on buying right now - so we have similar driving forces for both the laptop and homes albeit differing price points. Now, if I offer my laptop for sale for $3000 most of you will not change your plans and will say 'no, don't want it and I'm not ready to buy it now'. But, if I offered my laptop to you for sale at $1 then I would anticipate that I would be besieged with offers to buy it. But, the same amount of people were offered my laptop for $3000 as were those that were offered it for $1 - yet I would get a totally different buying response from the same buyer pool.

Nothing changed but the price of the item, yet we had a markedly different activity profile. The buyer pool remained the same, just the perception of value within the buyer pool changed. The same applies with the property market - the buyer pool remains the same, it's just the perception of value within the buyer pool that is different and this can be changed by the price of a home.

Supply and Demand

If we look at the following diagram:

It's all about supply and demand. If we consider the above situation in a period of time - 4 new houses come on to the market and in the corresponding period of time 9 houses go under agreement. The net result is reducing inventory levels for that period of time. If this continues over several periods of time then inventory levels decline. When we have fewer homes on the market then buyers are willing to pay higher prices for those homes to ensure they can buy them. In this situation home prices will go up because of reduced inventory levels. Now consider the next scenario - in a period of time we have 6 homes coming onto the market, and in that same time frame we have 3 homes being sold and going off the market, giving us a net increase in inventory levels for that time period. If this continues for several time periods we have increasing inventory levels. Given increased inventory levels there is a negative price pressure on those homes on the market. Sellers reduce prices to encourage buyers to buy their home rather than their neighbors. In this situation home prices go down because of increased inventory levels.

In a general sense, we can consider a trend, one way or the other, happening when we have the same situation occurring for 3 months or more.

Appreciating Markets

Appreciating markets happen because:

  • Interest rates go down. In general terms, buyers have a fixed amount of money to contribute toward the purchase of a home, they can also afford a fixed amount of money as a monthly payment. What governs how much they can borrow is the interest rate at which they can borrow that money. When interest rates are lower, buyers can borrow a larger principal amount. When borrowing a larger principal amount, combined with the monetary assets the buyer has in the bank to contribute toward the purchase, they can spend more when buying a house.
  • Sellers sell their homes for a lot more than they paid for them. Then the media start reporting on how buoyant the market is and how much homes have appreciated and more people decide to sell to take advantage of the great prices they can get for their homes.
  • When prices keep going up sellers begin to think 'If I keep my home for longer it will be worth more' which means that they begin to get reluctant to sell their house right now because the longer they keep it, the more its worth.
  • Lower inventory levels occur because people don't want to sell - they want their home to keep increasing and, after all, why sell when every day you keep your house its value goes up. Then the media begins to talk about how the 'bubble must burst' soon and the 'it won't be long before prices start crashing' articles appear - then we get more and more people deciding that its time to put their house on the market before the market starts falling.

Depreciating Markets

Depreciating markets happen when:

  • Sellers don't understand the real estate market and overprice their home when they put them on the market before the market starts falling. After all, their neighbor down the road made a boatload of money, they believe their house is worth more and price it even higher again. Then another neighbor down the road sees the two neighboring homes on the market and they base their price on those homes plus the additional features that their home has. Then another home comes on the market and because they believe their home is better than the others that are almost the same they list their home even higher. What is occurring is that prices are being determined based on what is sitting on the market NOT selling, and so it goes on. Prices for homes are being set based on homes that are on the market waiting to sell, rather than homes that have just recently sold.
  • Overpriced listings creating increased inventory levels because buyers are not seeing the value in the price of the homes and become reluctant to buy in this type of market.
  • Creating a 'tipping point'. The tipping point is the point where we change from an appreciating market with low inventory and rising prices to become a depreciating market with high inventory and dropping prices.
  • Reducing prices. We stay in the cycle of larger inventory levels and reducing prices until sellers decide its time to wait the market out and delay their plans to sell.
  • Cycle begins anew.

When sellers decide to wait we begin to get lowering inventory levels. With lowering inventory levels and fewer properties to choose from then buyers who need to buy will pay more for a home that just comes on the market that suits their needs rather than wait for months. During this time is when we see property developers begin to reenter the market place so there is increased demand on the homes that do come on the market. Then we hear the reports of the great homes people are buying, and more and more people begin to commit to buying because the market is turning... and so it goes on.

This is why watching inventory levels in your real estate market can tell you what is happening with the market and what WILL happen with the market well before the media begin to report on changes in the market. In fact, when the media begin to report on the market it has already happened and has been happening for a while...

If you would like an estimate of what your home would sell for in today's market I would be more than happy to come by, have a look at your home, and then provide a CMA (comparative market analysis) which will provide you with an estimate of what your home should sell for, along with a marketing plan to get maximum exposure for your home.

If you'd like to chat more about the topic presented here, or the Real Estate market in general, then please call me on (617) 997 9145, or email me at

Lexington Statistics

MLS data is provided by MLSPIN. While MLS data is believed to be accurate, it cannot be guaranteed. MLS data is constantly being updated, making any analysis a snapshot at a particular time. All raw data remains the intellectual property of MLSPIN.
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