Opportunity Knocks in Mid-Range Luxury

The Cromford Report has a chart (below) called Contract Ratio–a simple algorithm for taking the market pulse each month–from slow to normal to hot. Market expert, Mike Orr, defines Contract Ratio this way:

Contract Ratio indicates how “hot” a market is. It specifically measures the number of completed sales contracts relative to the supply of active listings. It is defined as 100 x (Pending Listings + Active Listings with Contingent Offer) / Active Listings Without a Contingent Offer. The higher the number the greater the buying activity relative to supply. If this number rises then it is a sign of growing contract activity and a positive signal for sellers. Conversely a falling number is a sign of a weakening market – either supply of active listings is increasing or contract activity is slowing, or both. In a balanced market for normal market segments, the value of the Contract Ratio is usually between 20 and 40. When it lies below 20 the market can be considered “slow” or a “cold market”. Above 40 can be considered a “hot market” and when it moves above 100 we regard this as evidence of a “buying frenzy”. In high-end luxury market segments the normal level is lower, usually lying between 15 and 25.

Opportunity Knocks in Mid-Range Luxury

What this graph says is that the current market, averaging all activity in ALL price ranges, is a very hot ‘buying frenzy’ Contract Ratio score of 114. While trending ‘cooler,’ still very much in the ‘buying frenzy’ zone over 100.

No doubt the slight cooling trend is a function of at least 3 major factors that have been amply discussed elsewhere—diminishing supply of distressed properties and the rapid appreciation in those lower-end market sector. There’s a seasonal component as well.

The less publicized story is what is happening in the mid-range to high-end, luxury property segment. We have speculated in earlier blog articles about the ‘trickle-up’—that rising prices and fewer underwater homeowners creates a demand for mid-range properties…’trickle-up.’

In other words, upward mobility follows. There are other factors as well, like the increasing availability of financing at continuing record low rates, et al.

For the purpose of this article, let’s apply Mike Orr’s Contract Ratio formula to the mid and upper-range properties for a snapshot of where we are today in the luxury sector.

Using his formula, mid-range homes (between $400K and $800K) have a Contract Ratio of 40. Looking back at his definition—a normal / balanced market being between 20 and 40, the contract ratio of 40 looks pretty good. Especially when we factor in that a normal / balanced market in the luxury sector is between 15 and 25.

Looking specifically at homes over $1M the Contract Ratio is currently 14, or ‘slow.’ Even so, luxury specialists will be quick to point out that the ‘best of class’ luxury properties, when priced ‘right,’ are absolutely selling.

With all of the above in mind, it is fair to say that both investors and owner-occupant buyers may do well to direct their attention especially to the mid-range. Here we find that the bleeding has stopped. The market is stabilizing.

When we look at asking prices in a market with low inventory, prices are on the rise. Pending sales and closed sales have yet to show a significant appreciation trend, but this may well be where a significant investment opportunity lies.

Another mid-price range indicator is the Number of Month Supply. In Scottsdale, where the average sales price is just $497K, there are currently 462 active listings. In that same range there have been 1045 closed sales in the past 6 months, or a market absorption rate of 174 per month. If we divide 174 into 462 we get a number of month supply of less than 3 months! Note: A 6-month supply of homes is considered balanced. Below 6 months favors sellers and explains why mid-range prices in Scottsdale are on the rise–about 5% year-over-year (comparing the average closed $ Sq/Ft over the last 6-months with the same period in 2011).

For buyers of mid-range properties the message might well be that the appreciation train has left the station.

From Moody’s Co-founder and Chief Analyst Mark Zandi comes this: ”We’ve clearly reached a key psychological shift in home buyers’ psychology, where folks are now starting to worry about missing the boat, rather than fearing whatever house they buy, no matter how attractive the price, can only go down in value,”

Time to jump on board?

This entry was posted by admin on September 16, 2012 at 11:29 am under Arizona Luxury Real Estate Blog. You can leave a response, or trackback from your own site. Follow any responses to this entry through the RSS 2.0 feed.

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