Market Report: New Residential Real Estate Metric: Residential Liquidity Ratio
William G. Hardin III and Ken H. Johnson Florida International University Department of Finance and Real Estate Jerome Bain Real Estate Institute
The most common real estate market metrics in residential real estate include days on market, months in inventory, and median sales price. While these metrics tell much of the story about the state of real estate markets, they are absolute values, and as such make it difficult to compare one time/price/area segments with another. In order to get a clearer picture of market health, a measure of market liquidity is needed. Market liquidity is essentially a relative measure of the likelihood that buyers and sellers of property will come to an agreement during a specified length of time. In this report (and those that follow), market liquidity is defined as the ratio of successful marketing attempts to the overall number of properties marketed during a month, within specified area segments (Miami-Dade, Broward, and Palm Beach counties), by price ranges (less than $500K, 500K to 1M, and over 1M), and across property types (Single family Residence (SFR), and Condominium (Condo)). The goal of these regular reports is to provide market participants (buyers, sellers, real estate professionals, developers, state and local authorities, and policy makers) with better information with which to make informed decisions.
Market liquidity will always fall between zero (0) and one (1). When the score falls near to zero (0), this suggests that very few buyers and sellers are agreeing to terms. When the score moves close to one (1), this suggests that the chance of buyers and sellers agreeing to terms is very high. Since the liquidity measure is a relative score, it is difficult to interpret a single score, i.e. it is hard to say what a particular score means, although a typical market would have a ratio closer to one (1) than zero (0). Instead, when scores are compared across time, the measure is most helpful in determining the general direction of market health. Specifically, when comparing across time frames, increasing liquidity scores generally denote increasing market health, while decreasing scores generally suggest that overall market performance is declining. Additionally, liquidity measures can be compared across price, type, and location segments to provide relative levels of performance.
An additional interesting feature of this market liquidity measure is that it suggests when, on average, buyers or sellers are getting “better deals”. Specifically, when scores are falling and are relatively close to zero (0), it is most likely that buyers are receiving better terms, i.e. it is time to buy1. When liquidity scores are rising and are relatively close to one (1), it is most likely that sellers are receiving better terms, i.e. it is time to sell2. It is these two extreme (and most important) forces that serve to bring markets into long-run equilibrium.
Beginning in November, 2009, the Jerome Bain Real Estate Institute will regularly publish Residential Liquidity Ratios. The data for this and future reports comes from the Southeast Florida MLS and its participating Realtor® Associations with specific access provided through RAMB (Realtors Association of Miami and the Beaches). We gratefully thank all participating Realtors® within the Southeast Florida MLS for contributing to this essential metric as it brings a level of transparency to the market place that has not existed, making the uncertainty in each transaction lower and therefore increasing the likelihood that a buyer and seller will agree to terms. In short, better informed participants are more likely to make decisions resulting in better overall market liquidity. Ratios for single family residential (SFR) and condominiums will be provided at the county level, on an overall basis, and segmented by listing price. Each month the ratios will be provided along with a brief commentary.
1Of course this strategy assumes a holding period that extends until scores are again rising significantly.
2Of course this strategy assumes alternative housing arrangements can be arranged until scores are again falling significantly.