How does the industry calculate ‘days on market’?
The best way to calculate it, is in the industry norm.
Firstly, days on market can be in relation to a single property, at a suburb level or if necessary, a larger region.
For a single property, it’s ‘the numbers of days that the property is on the market’.
The moment that property was listed for purchase to the public, through to the moment it was sold, equals the number of days that that property was on the market.
Next, at the suburb level, the ‘days on market’ figure is calculated by the the number of days the average property takes to sell in that market.
The important point that we need to make before we move on is..
“What is the actual sale event that we look for when calculating days on market?’
Obvisouly the listing event, the moment that property is put on the market is the easy part. That’s day zero. The day that it actually sells is not so straight forward.
This is because the sales event could be:
- The day that the property goes under offer?
- When the offer is accepted?
- When the offer is made?
- When the property goes unconditional?
- Or when the property actually finally settles?
The number that we use as a research company in calculating days on market, and I feel that this is an industry norm, is the day that the property goes unconditional. That property is now officially not on the market. It’s no longer available for purchase.
Up until that point the contract could fall over and it could go back onto the market. That’s generally the accepted period of ‘days on market’.
What does it actually mean to be listed? Well, the properties now available online, the properties, are posted in a window at the local real estate agent and then obviously it is available publicly throughout the listing period to the sale, when it becomes unconditional.
The next issue we look at, if we were to take a point in time today to calculate days on market, some properties are going to be on the market, some properties are going to be selling today and some properties might be listed today.
When we calculate a days on market number, we have to look at it over a time period. It has to be the average or the median days on market for each property that has sold in a given time period.
Let’s take a month period for example.
We have properties that have been listed prior to the period beginning and they have sold within, we’ve got properties that are listed within the month period and they are also sold within and we’ve also got other properties that are listed within the month period or even before and they are not sold yet, they are still on the market.
So when calculating the ‘days on market’ figure for this suburb, the property that has not sold yet, is not considered.
It is still on the market at the end of that month. We only look at the two properties that have sold within that month.
When calculating the suburb average we add all of the properties that have sold figures together.
Three properties have sold in that period. When we’re calculating the average days on market for that period, lets say its three properties that sold at 30 days, 20 days and 10 days.
So that would make it 30 plus 20 plus 10 equals 60.
Divide it by three (for the three properties) = 20. That’s the average days on market figure for the rolling month in retrospect. The median obviously in this case is the middle number which is 20 as well.
Sometimes, a median figure for days on market is less volatile. It cuts out the edge cases, we use it more typically because it does reveal the more current and accurate market dynamic, when you go into averages, it might be thrown out by very long term property that has been sitting there for some time.
Okay. So we generally use that median figure to assess the current rolling days on market number. Now, the important point is not the actual days on market figure for the area. It is the trend line of that number.
It’s the days on market figure tightening or expanding.
This is a demonstration of the market dynamic. So a balanced market, is where you would assume that ‘days on market’ figure as a signal of the market demand, the market heat as stable also.
But as a market transitions to where the sellers have the momentum or there’s more sellers than buyers. It’s actually a buyer’s market, the buyers have control and you would expect days on market to be increasing, lots of sellers, lots of properties come into the market, the buyers can be very fussy.
There’s less of them. They have more to choose from. The properties are sitting around on the market at the same time. So, in a buyer’s market, days on market, you would expect the days on market to be going up. Contrast that with more buyers than sellers.
This is a seller’s market, this is the market that we’re operating in 2021. In this example, we have a very tight market, limited supply and lots of buying demand. In this example, you would expect days on market to be decreasing when we are trying to identify areas to invest. We don’t necessarily look at the days on market number.
It does generally need to be under 90 days to demonstrate a healthy market nationally. But it’s the trend line. It’s the velocity of change of that days on market that signals to us a change in buying dynamic and that’s where the opportunity does comprise.
But how do we assess that change rate?
Well if we’re looking at a month long period, we’ve got a 30 day moving average for days on market. If we were to then contrast that to a 90 day period, we’ve now got one short and one long term moving average.
One days on market figure could be trending down and the other one could be trending upwards.
It’s the cross in those moving averages a short term moving to a long term or a long term moving to a short term. It’s the cross in those moving averages that signifies a change in direction. It signifies to us as an investor that there is a change going on to the buying and the selling dynamic and that creates opportunity!
It might be an opportunity to leave the market because the heat is dissipating or it might be an opportunity to start considering the market, because we have a tightening of the ‘days on market’ figure.
So days on market, it seems simple on the surface, but we need to unpack it to understand how it impacts us as investors, how it creates opportunity and how it helps us to identify those areas to stay away from.