Is Days on Market a Dependable Housing Market Indicator?

I guess, due to habit, I have decided to include average days on market figures for my most recent market updates. I began to think about it further and I realized that most average consumers don't realize the weaknesses in this statistic. At first hand it seems like a pretty cut and dry statistic. Days on Market, or DOM, should be the number of days a property has been listed for sale, or in the case of sold listings, the number of days from the original list date to the day a property is put in contract. Many consumers and Realtors use the statistic to get a sense of the market in general and to help determine a strategy when preparing to write an offer.

Sounds Reasonable, Why Shouldn't I use the Days on Market Statistic?

First, homes do not always sell when listed. The average Days on Market takes the total number of days on market for all the properties listed and divides that number by the total number of listings. The problem with this, is how do you measure the Days on Market for properties that expire from the MLS or are withdrawn by the owners after not selling. When viewing the average days on market for active listings it is important to realize that it would be a much higher number, if homes that are no longer listed and that never sold were included in this calculation.

Second, homes that don't sell are often relisted. I can't speak for any other MLS, but for Metrolist MLS in the Sacramento region, if a property is relisted after being withdrawn or expiring, the Days on Market is reset to 0. This can have a dramatic effect on the average Days on Market, because what was a listing with 180 days on market last week, is now viewed as a brand new listing and reset to 0 DOM. Because most lisitngs are listed for six months or less, this tends to put an upper limit on the average Days on Market statistic of about 180 days.

Third, some agents intentionally enter listings in the MLS for short periods, so they can relist the property every 30 to 90 days to reset the Days on Market figure. Whether this is ethical or not, it is done quite regularly and if done correctly is within the MLS rules.

Fourth, the average days on market for sold listings applies to the best listings in the crop. Depending on what market you are in, the number of homes that will sell at any given time can be anywhere from 0 to 100% of those that are listed. In the case of the Placer County region, somewhere between 10 and 20% of the currently listed homes have sold in the recent past, which means that 80 to 90% have not sold. For the month of November the average days on market for homes sold in Placer County was 60 days. This would lead some home sellers to believe that it would be reasonable to expect that if their home were an average home they would be able to sell it within 60 days. This is not the case, if they were among the top 10 to 20% of homes on the market, based on price and amenities, they could hope to sell within 60 days. If they were simply an average home for sale in this market, they may not sell at all.

Ok, So it's Worthless, Why should I use it at all?

While the Days on Market statistic is not everything we would hope it to be, it is still useful when viewed correctly. If you take a large enough sample size and compare it to recent period, such as the previous month, large changes in DOM may indicate a positive or negative trend. If you try to compare different Multiple Listing Services with different rules, if you try to compare the statistics for an area with too few sales or if you try to over analyze the differnces between markets in two different parts of the housing cycle, such as a buyer's market and sellers market, you are using it incorrectly. It can be used effectively to measure general trends, not to confidently predict the future.

For the more practical purpose that most buyer's want to use DOM, which is when they are deciding what to offer a seller when writing a contract. I would suggest a few things. First, have your agent pull up the history of the property. Don't just view the current days on market, but also look to see if it was listed before. Most agents have access to this information. It is not something that has been added to most public real estate portals yet. Second, have your agent pull up the pricing history. If the house was just dropped in price 15% yesterday, you probably will have a hard time getting a large reduction out of the seller. If the home has been at the same price for months, they may just be stubborn and need an offer in front of them before they will budge.

Days on market can be a useful statistic. My advice is to take it for what it is. Realize that it can be manipulated and should be verified. Otherwise, use it for a general sense of the market and go to your Realtor for more reliable data on any specific listing. If you don't have a Realtor, I would be happy to help, I can be reached at 916-728-1981, through my website www.PlacerCountyHomesandLand.com or by e-mail at pat@patandalison.com.

Comments

[Jennifer D. Meacham]

Jennifer D. Meacham Says:

Thank you for your thoughtful and informative post. I will use this information as background when covering the real estate market for "The Bottom Line," my business/personal finance column that runs in three of The Oregonian's zoned tabloids.

[Patrick Hake]

Patrick Hake Says:

That sounds good Jennifer. I am glad that you found it informative.