How Active-to-Pending Ratios define a Hot Market

When talking with buyers and sellers lately I spend a lot of time explaining the “Hot Market Factor”. What this means is that when doing a market analysis for a buyer or seller, we are looking at Sold data, but we give much more weight to Active and Pending listings than we would in a neutral or flat market. The Sold homes have actually closed and we know the price paid, so they are always most important to look at. But we also look at Pending and Active listings to see what current activity is like in the subject area. After we arrive at an average price sold for similar properties, we decide if a “hotness factor” needs to be added to the list or offer price. This can result in list prices or offers that are “over market value” based on the sold comparables, but which are reflective of the actual immediate activity and market demand of an area and/or price range.

For example, let’s look at Austin MLS Area SW, which is Southwest Austin, and see if it is “Hot” or not.

As I write this, there are 168 “Active” listings in MLS Area SW (last January 2005 there were over 350) and there are 128 “Pending” listings. The hotness ratio for area SW is 128/168 = 76%. Anything above 50% is very good. Area SW is currently the 4th ‘hotest MLS area in Austin overall, but there are pockets within SW that are absolutely on fire with activity, and it’s why we like this area for appreciation oriented buyers.

Let’s break it down further. What is the hotness ratio for area SW homes priced less than $200,000? There are currently 33 Active and also 33 Pending listings priced under $200K in area SW. This is a hotness ratio of 100%, or about a 1 month supply of homes in that price range. That is a hot market folks!This is congruent with our actual experience so far this year. Buyers have to move fast in making an offer or they miss out on deals in area SW. We are seeing many full price offers and it’s becoming very hard to find good quality homes priced under $200,000.

Let’s break it down to a specific neighborhood and ignore price range. In the Legend Oaks subdivision there are currently 3 Active and 8 Pending listings. A hotness ratio of 267%.Wow! Of those 8 pending listings, two came off the market in 0 days – which means they did not survive 24 hours in the MLS before an offer was made and accepted. It’s usually a full price (or better) offer with no counter-offering that get accepted that fast. The others came off the market in 2, 6, 7, 13, 17 and 19 days. None lasted even three weeks. The three active listings have been on the market 0, 4 and 20 days. Of the 9 sales that have closed so far in 2006, five were sold in 10 days or less, and the others sold in 20, 31, 31, and 35 days.

Do you see how this works? Legend Oaks is currently a HOT NEIGHBORHOOD within a Hot Area. An agent, seller or buyer doing a Market Analysis for a home in that neighborhood ought to be factoring in the brisk pace of activity there, lest they underprice their home and sell it too cheap, or make an offer that is not competitive.

The trick is knowing how much to adjust in actual dollars. Even a super hot market won’t respond to a home overpriced beyond reason, or a home that isn’t properly prepared for showing.

By the way, the median home price in area SW has appreciated 24% in the past 12 months (Jan 2005 to Jan 2006 data), which should be no surprise given the supply and demand ratios outlined above. My best guess is that it will continue to be one of the strongest areas in Austin for many years to come due to the great neighborhoods, good schools and parks, proximity to amenities and shopping, and easy access to Mopac and IH35.

But as the average price of area SW keeps getting higher, buyers on the pricing cusp will eventually migrate to nearby areas that are still more affordable, or they may settle for a smaller home or an older home that needs work. Many will decide that the exta 10 or 15 minute drive to Buda is worth it to save $20K to $30K on a similar home. Others may leap-frog all the way up north where there is still a glut of nice homes in Round Rock and other areas that can be purchased cheaper.

If you’d like to know about your specific neighborhood in Austin, call Steve or Sylvia at (512) 301-5811.

1 thought on “How Active-to-Pending Ratios define a Hot Market”

  1. Thank you for explaining the active to pending ratio. I needed to figure that out for our local Long Beach real estate market in California. The market has picked up but I wanted to share this statistics to the buyers that are still on the fence in 2008.

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