Infinity Wars
Our family is pretty into the Avengers movies, especially our youngest. She knows all of the characters, all of the backstories, and all of the ways the storylines interact with one another.
And she has made us all fans, too.
Even if you haven’t seen Infinity Wars or Endgame, you can still read this since it really isn’t a spoiler post. It only references only one part of the overall plot line –– where Thanos, the ultimate in all-powerful galactic supervillains, obtains the final Infinity Stone. And just so you know, whoever controls all of the stones has virtually unlimited power over time and space.
Upon gaining control of the final stone, Thanos snaps his fingers and randomly destroys half of all life in the universe.
Real Estate and the Avengers
So, since I am a Realtor, I tend to look at all things from a real estate perspective –– and yes, that even includes summer blockbuster superhero movies (sorry, but I never really turn it off.)
Early in the movie, Paul Rudd (Ant Man), walks down an overgrown and now vacant San Francisco street (start at 1:14 of the trailer if you care to see the scene), and it hit me –– imagine how the removal of half of the buyers affected global property values?? And, then imagine what it meant to suddenly have half of all of the world’s housing effectively vacant??
We all thought that the implosion of the mortgage market in 2008 was bad, but it pales in comparison to what Thanos was able to do with a snap of his fingers.
Supply and Demand
Now, imagine yourself in this post-Thanos snap world. Do you think your pre-Thanos Zestimate would still be accurate? Or your $/SF? Or lot prices? Do you think you still need escalator clauses?
You get the picture.
Not to go all ‘Econ 101’ on you, but the supply of a thing and the demand for a thing are the two factors that drive the value of any asset. When supply is high and demand low, prices go down –– and vice versa.
Size, age, materials, etc. are measuring how one home compares to another –– but does not measure the demand for the home itself.
All of the other metrics we use to establish value –– size, age, materials, features, colors, dollar per this, assessed that –– they are measuring relative value. In other words, they are measuring how one home compares to another –– but not the demand for the home itself.
It is a subtle, but hugely important, distinction.
Signal to Noise Ratio
So you are telling me that $/SF doesn’t matter? Or my assessment? Or my most recent appraisal?
No, they matter, but just not in the way that you might think, and are distracting you from the bigger issue.
‘Signal to Noise’ (or the Signal to Noise Ratio / SNR) is generally used to describe the static or other interference that makes a specific sound difficult to hear. Ever tried to talk to someone with a hearing aid in a crowded restaurant? It’s kinda like that…
Signal-to-noise ratio is sometimes used metaphorically to refer to the ratio of useful information to false or irrelevant data in a conversation or exchange
–– Wikipedia
The concept of SNR originates from those who listen for a living –– astronomers, submarine sonarmen, soundboard engineers –– but has been adapted into other domains. The concept is especially applicable when describing the insane amount of information we now have at our fingertips and how to decipher that which is essential from that which is superfluous.
And without the ability to easily filter the important from the unnecessary, we are finding out that having access to more information doesn’t necessarily make us better decision makers.
Signal to Noise in Real Estate
The SNR concept, when applied to real estate, works like this: every measurement of size or count of features, every past sale, every website offering estimates of value, they are all noise and distract us from the only thing that matters –– the number of buyers seeking a certain type of home and the number of homes available.
Stated simply:
Signal = Supply and Demand
Noise = Everything else
Each time a buyer enters the market, they are subjected to differing inventory, differing competitive landscape, differing interest rates, and differing economic conditions — i.e. different supply and demand conditions.
Does the recent past have an impact? Of course, but it’s akin to driving your car while looking in your rearview mirror. It tells you where you recently were, but not necessarily where you are going.
Measuring Supply and Demand
Ok, then, how does one arrive at this magical supply and demand measurement you are espousing?
Approximately 65% of all sales that will happen in any 12 month period, happen between February and June –– leaving the other 7 months to fight over the remaining 35%.
–– From the Central Virginia Regional MLS
Measuring SUPPLY is easy –– you just count the available listings.
But estimating DEMAND is far harder. It literally requires us to look into the future and guess about events that are, by definition, yet to happen.
That is no easy task.
Estimating Demand
But if we use history as a basis, we can generally get a sense for the following:
- How many homes historically will be absorbed in a specified time frame.
- How many additional new listings have historically entered the market in a specified time frame.
- How seasonality affects the market being examined.
Take a look at the charts below:
Available and Pending Listings –– Region
Available and Pending Listings –– City of Richmond
Both charts track the same two metrics –– the number of available listings, and the number of listings that are under contract (pending.)
The line showing the pending inventory rises sharply from February through April/May, and then falls quickly from June through October.
As I write this blog, it is June, and the market is in the throes of its seasonal adjustment. Distinguishing signal from noise is as important in the next several months as it will at any point during the year.
And as is readily apparent to the naked eye, the pattern tends to repeat itself year over year.
Seasonality
What you are seeing is the impact of seasonality over the course of a 12 month period. And while each year isn’t 100% similar, the peaks and valleys tend to follow a fairly predictable schedule.
To put some actual numbers to it –– approximately 65% of all sales that will happen in any year occur between February and June –– leaving the other 7 months to fight over the remaining 35%.
That is a massive difference.
Using the Information
So if you look at this information strategically, what do the shapes tell you about the demand for housing in the latter part of the summer?
- If you have a goal of selling your home in the next 60 to 90 days, what course of action should you take?
- If you see an additional 5 homes for sale, how would that impact your strategy?
- If you see that inventory is lower than in past years and marketing times are still low, how might you counter an offer differently?
Having information matters. But interpreting the essential information correctly matters far more.
Summary
As I write this blog, it is June, and the market is in the throes of its seasonal adjustment. Distinguishing signal from noise is as important in the next several months as it will at any point during the year.
When you are the 5th best house in a segment where there are only going to be 2 more sales this year, it doesn’t matter what brand of stove you have.
It is human nature to lean into the quantifiable. Being able to point to a prior event and base a decision on it gives us a feeling illusion of certainty safety.
But being measurable and being important aren’t necessarily the same thing.
Do you know the worst part about living in this data-rich world? The important information doesn’t have the ability to raise its hand and tell you that it is important. Being able to quickly sift through the information and find what is important is a rare skill that few have.
Does $/SF matter? Or what your neighbor’s home sold for? Or what Zillow says? Or even what the appraisal said last month? Of course they do, but only when coupled with supply and demand.
The bottom line is that when you are the 5th best house in a segment where there are only going to be 2 more sales this year, it doesn’t matter what brand of stove you have.
