On the Theory People Don’t Want Spin; Portland Market Dynamics

Posted on February 20, 2008
Filed Under Statistics, Portland, Selling Real Estate, Buying Real Estate, Real Estate, General |

Charles Turner asks an excellent question:  How Do We Measure Real Estate Markets?  Statistics exist to prove almost anything one wants to prove; what, though, will give the best indication of a market’s health?

When I was with Nordstrom in the seventies, volume was king.  While most department stores calculated success on their gross margin, we lived and breathed (and were paid bonuses on) how much went through the register.  If there was a YoY increase, that meant we had what the customers wanted and things were running relatively smoothly; if a decrease either our inventory mix was wrong, our service was off, displays were poor or any of a number of lesser factors needed attention.  If we had an increase but another store had a bigger increase, we still had to find out why.

Note we didn’t calculate yearly.  Or quarterly.  Or monthly, weekly or daily.

We took readings every hour.  By doing so we could catch problems early, before they became disastrous.  And problems were never, ever greeted with excuses - But there’s a recession! - they were always met with the question: What are you doing to fix it?  We’d fly missing goods in at our expense just to make sure we could meet customer demand, something department stores couldn’t do with their margin fixation; but ironically our gross margin was the best in the industry.

Assuming we’re talking about the measurement of a given market and not whether or at what price an individual property will sell - AREIL - I think economists spend too much time with median price, which always gets the lede, and too little with YoY volume. 

It’s comfortable knowing Portland is one of the very few markets in the country with a consistent line of median increases, but median price itself is a tenuous measurement: It doesn’t measure the value of individual homes, rather it measures the mix of homes sold.  If a higher end customer is buying and a lower end not, median goes up accordingly, even though there’s been a 32% decrease in volume.  I think the drumbeat of Prices up again! has led to a degree of complacency on both sellers’ and agents’ parts, keeping individual prices too high.  It’s a little like the department store buyer who never takes a markdown to protect her bonus, then wakes up one morning to find out she has no customers left.

If we’d instead paid closer attention to volume - chart here - by last May we’d have seen serious problems coming, and by August, when volume was steeply heading south resulting in inventory steeply heading north, we could have adjusted accordingly.  There’s an axiom in retail that the first markdown is always the cheapest, and we didn’t take it.  Median price was still going up.

I haven’t gotten out of the habit; I still check numbers at least weekly:  The consequence will be that in February we’ll continue the 30%+ decrease in volume, coupled for the first time (I predict) with a slight decrease in median price. 

This needs to be emphasized: This does not reflect on individual homes, it’s a collective analysis.  It does mean that we all - agents, buyers and sellers - need diligence in our decision making, and sellers especially need to understand that you’re better to be 5% under the market than 1% over, and you’re much better being the first to that price.

There are still many good reasons to buy and even to sell.  It’s a tough - but by no means dire - market.

The question: What are we doing to fix it?

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