How do we measure the health of a housing market? LIQUIDITY is a far more accurate measure of a real estate market’s health, while PRICE simply takes its temperature.
If we’d consider a market healthy when prices are increasing, we’d have to say that the boom of 2004-2006 was in the best shape of its life, an Olympian, in fact! But, we know this isn’t true. (Looking back, it was actually when the “cancer” metastasized most rapidly.) Conversely, a declining-prices-means-health argument certainly would find few friends. Pricing trends don’t measure the health of a housing market.
Consider the fact that most sellers in a higher priced market trend will repurchase at higher prices, while sellers in a declining market almost always repurchase lower. Gains or losses on the sale of real estate are usually accompanied by repurchases of like kind. (It wouldn’t make much sense to think that a seller may take a bath on a sale & move way up on the $-scale, as a result.)
Well, if pricing trends only take a market’s temperature, then what’s a better measure of a housing market’s health? LIQUIDITY. Liquidity, in its most basic terminology, is the likelihood that a property will sell (or close). This is really the most closely tied indicator to a seller’s end-game, their goal of actually SELLING their home at or close to its market value at a time when they decide to market their home. Liquidity measures the degree of certainty at which a seller will reach that goal.
Liquidity is measured in the form of a ratio, providing a percentage, much like a batting average in baseball. The higher the percentage, the higher the degree of certainty. The lower…well, you know. How do we calculate this “degree of certainty“? It’s simply derived by comparing successes to failures in a given market over a certain time frame. In real estate, “success” means one thing only, SOLD…closed transactions. Then, divide by the “failures” (aka un-successful listing transactions). The failures come in the form of cancelled contracts, withdrawn, and expired listings.
The resultant calculation gives us a strong approximation of the likelihood of a property listed for sale in that market reaching the “closing table”. As this percentage increases, so would the health of the housing market for the area considered.
So, Liquidity is a better measure of a housing market’s health… not price.
Click to view an analysis of Absorption Rate & how it’s calculated.
I’m Brian Morgenweck, Broker/Owner of 
Power Realty Group in Bergen County, NJ.
If you have any questions, I’m here to help.
Connect with me at (201)489-3020.
Please visit JerseyHomeScene &
JerseyCondoScene & find out how to list
your Bergen County home or condo to vastly
improve your “likelihood of success.”
