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[Market Report Pulse] Sales Contract Data Can Mean Nothing

One of the most sought after trending tools for housing markets is contract data. Not listing data, not closed data. Contract data.

Compile a lot of data across all regions, property types and price strata and you are golden. You are observing the market as close to the “meeting of the minds” as is humanly possible – you have its proverbial pulse.

I thought to write about the concept of reporting contract data after I got a call from The Real Deal [1]about a new contract-based real estate market report. Their founder is a very creative, very smart and very successful marketer of real estate, first as an agent and then as a marketing expert for new developments. Visually, the report is beautifully done [2], consistent with the quality of their firm’s marketing materials and online presence. However, they might consider dropping the name of “real-time” from the report. It’s monthly. I understand the intention, but the use of the phrase “real-time” infers a live feed, which this report is not. Isn’t “monthly real-time” an oxymoron?

A quote from The Real Deal article:

It tracks contracts info. To me, that’s what reflects the marketplace and where we are currently, not closed information, which is actually a look back in history.

Another company attempted “real-time” a few years ago by treating real estate listings like the stock market [3] and began publishing a “ticker” type interface. I have to give them credit for the innovation, but it never really got people’s attention.

But I digress

What is contract data exactly?

It’s a property sale with an executed (both parties signed) contract – It is usually 45-60 days ahead of a closing date if new development data is excluded. Actually this 45-60 day time frame is currently expanding as lenders become more difficult to deal with. New development data in the mix could lag the market by 1 to 2 years.

I sort of dealt with contract activity in the most recent market report numbers in my 4Q 2008 Manhattan Market Overview [4] but not in the traditional sense of aggregating contract data and trending it.

Our appraisal firm began to see a pattern in late September 2008 where current contracts of properties we were appraising, were clearly lower than contracts signed in the summer of 2008. The range was roughly 15% to 20%. My 20% number has been widely referenced by the Fed [5], Goldman Sachs [6] and others, and in fact, page one of AM New York [7] published the number “20%” in red on the entire cover. But our conclusions were based on more of a case by case analysis, similar to a repeat sales analysis.

I don’t currently issue contract reports but I certainly aspire to, but only when I have credible results. Periodically I’ll see one of my appraisal competitors distribute a press release with their own contracts tabulated. I’ll see real estate brokers and marketing agents issue contract reports.

Readers oooh and ahhhh over the relevancy of contracts because the data is perceived to be fresh and current. In principle it is current, but in practice it is much more subject to skew than other data.

I also wonder why methodologies are never fully provided, especially those prepared by marketing groups or departments.

Here are the issues that make much market analysis of contract reports suspect, despite perhaps the best intentions of the authors.

I have never met a broker that will share contract data in bulk because it can jeopardize their company’s sales and commissions. We are able to get contract data periodically, but not in bulk. If producers of contract reports can win me over on these key issues, I am ready to jump in with two feet. NAR publishes a pending contract index and frankly, not many people I know believe the results.

In other words, contract data is the Holy Grail, but I am not convinced it’s yet achievable as a reporting tool.

Now give me a sales contract specific to the appraisal we are working on and I am happy ’cause that’s a whole ‘nother story.