3 Bogus Real Estate Statistics – Know Them Or Be Burned By Them

by Joe Manausa on August 9, 2008

How To Sell A House On Your Own FSBO

As somebody who is very interested in the logic and math behind our industry, I have measured or copied many statistics that I like to use to help me guide my company and my business in the real estate industry. What I have found along the journey of my career is a disturbing habit of our recognized industry leaders to quote statistics that have no basis at all. Some of them are downright wrong! This article will recognize three of the most important bogus real estate statistics that everyone ought to know about.

Three Bogus Statistics You Need To Understand

  1. 80% of the business is being done by 20% of the agents
  2. The average market time to sell a home is 153 days
  3. The average home sells for 97.3% of its listed “for sale” price

The 80/20 Rule

One of the sharpest people that I know in the real estate industry owns many Homes And Land Magazine franchises. He is a good friend of mine and I respect his knowledge, insight, experience, and most importantly, his success as a business owner. So believe me when I tell you how shocked I was when

He Used An Unfounded Statistic With Sources Back To NAR

He told me “Joe, this market is tough. I now understand that NAR says the 80/20 rule is the 90/10 rule!”

I’m not sure what industry started this “statistical rumor” first, but I heard it back in 1991 when I first began my real estate career. I was told that our industry was lopsided, and that according to NAR (the National Association of Realtors), our industry was the perfect representation of the 80/20 rule: Eighty percent of the business is done by twenty percent of the agents. So, like many others, I took this at face value and believed it to be true….. for a while.

Years ago, when pulling real estate market reports, I figured I would test the 80/20 rule. You see, Tallahassee quite often is a great microcosm of the national real estate industry. Our average sales price is typically close to the national average, and our market typically moves up or down in parallel to the national real estate market. So I figured we would be able to validate the 80/20 rule as well.

Much to my amazement, the results of my study showed that the 80/20 rule was not true in Tallahassee. Every so often, I try the test again, only to reaffirm the initial findings. Somebody made this up! While my study in Tallahassee does not represent enough evidence to refute a national study, I suspect that a national study cannot be found. If so, send it my way.

For the purpose of this blog, I pulled all of the sales from the MLS in 2007 and came up with the following graph:

As you can see clearly from the above graphic (click the image for a larger view), 20% of the business is being done by less than 64% of the agents, while 45% of the business is being done by 10% of the agents. So the 90/10 rule is off by 100%! Why does this matter? Because if the 90/10 rule were correct, then the consumer would be wise to pick one of the few elite agents in the real estate market. Rather, the findings suggest that picking the right real estate company is far more important. The workload is spread out among many agents in the market and the consumer should be focused on the issues that are critical to the consumer, such as the bundling of services offered and how the company is prepared to work to the benefit of the consumer.

Average Market Time

If I see another report by a PhD that talks about “average market time” to sell a house, I just might throw up. For anybody who has studied statistics, you will appreciate that garbage data will yield garbage results. This is the case with average market time. You see, all these people generating these reports have overlooked some pretty important “noise” when conducting their findings. Certain elements that do not make it to the market time measurements include:

  • The amount of time a home was on the market under a previous listing number
  • The amount of time a home was on the market “by Owner”
  • The amount of time a home was on the market (when the home in fact never sold)
  • The fact that many Realtors will cancel a listing and re-list it to make it appear “fresher” in the market

Here is a scenario that will demonstrate why “time on market” should be ignored. Mr. and Mrs. Homeowner decide they would like to move. They put a sign in their yard and they advertise online that their home is “For Sale By Owner.” This goes on for three months, with no contract for the Homeowners. They decide to list with Broker A because they’ve known Broker A for 20 years. Broker A lists the house, puts it in the MLS, and proceeds to market the property for sale. Six months later, the Homeowners decide they need to talk to another real estate brokerage company. They have since moved to their new home and they are really needing to sell their home. They interview Broker B at Brokerage B Realty and decide that they will list their home with that company. Brokerage B puts the property in the MLS and sure enough, a contract is executed in just 1 day. The Homeowners are ecstatic and they close on their home 45 days later. So, what was the market time for the Homeowners house?

If a Realtor pulls a market time report, homeowners house will show 1 day of market time for the closed sale. It will overlook the 6 months of market time which failed to produce a sale with Broker A and it will not even know that the Homeowners marketed the home for three months on their own. This discrepancy of roughly  150 days on the market means that we cannot trust the market time being measured by the MLS systems.

Why does this matter? Because of 2 major reasons. If your real estate professional is quoting you average market times, then most likely you are not dealing with a professional. Additionally, you need to question your real estate brokerage company about time expectations and what kind of price range should produce predictable sales results. A competent real estate professional should be able to give you a price range that  will get your home sold in the time frame in which you require for your move.

Sales Price to List Price Ratio

Much like market time, the ability of the real estate professional to manipulate data (often times for good reasons) renders this measurement nearly useless. How important is this statistic if the typical homeowner were to know that the ratio represented the average sales price compared to the FINAL LIST PRICE of the property. Imagine the scenario used above, where the Homeowners first listed their property as a “For Sale By Owner,” then with Broker A, and then finally with Broker B. The only ratio measured would be with Broker B’s list price.

Why does this matter? Because of the same two reasons listed above. If a real estate professional is discussing average ratios (like claiming she has a higher than average sales price ratio), then the homeowner needs to understand that this person is either being deceitful or ignorant, and neither trait will be beneficial in the process of selling the homeowner’s home. Secondly, if this kind of information is used to help the homeowner determine the asking price set by the homeowner, it could end up costing the homeowner a bunch of money through lost market time or incorrect pricing.

The fact is that the MLS is not a great source of factual statistical data for many reports, as it is a marketing tool designed to help brokers market their properties – to other brokers. Often times, MLS information is manipulated in the effort to aid a client. Plenty of other resources exist that will allow a real estate professional to study real estate market statistics.

Know the source of the data and you will know whether or not the results of the study have merit, and more importantly, whether or not you should rely on the reports. Knowing these three bogus statistics can help you confidently select the next real estate brokerage company that you decide to use to sell your home.

Information on mortgage bonds.

 

{ 20 comments… read them below or add one }

Property Sale August 11, 2008 at 1:17 am

As real estate transactions have become more legally complex, many firms have turned to college graduates to fill positions.

HDC August 11, 2008 at 3:08 am

Nice information you have here. i would suggest this to my friend who involved in this industry

Home Office Organization - Sherri August 11, 2008 at 1:05 pm

Very informative article. If the reports and statistics you site are basically worthless, what reports and statistics are valid? Can you elaborate on valid sources of statistics?

Thanks,
Sherri

Julie August 11, 2008 at 2:30 pm

You make great points – and I always love the quote about statistics – “Most people use statistics the way a drunk uses a lamp post, more for support than enlightenment”. But I’m curious to know what measures you would use to monitor the activity in the market.

Joe Manausa August 11, 2008 at 6:37 pm

Sheri, there are plenty of valid stats in real estate. The problem is when people report that the information comes from NAR (the National Association of Realtors), it is wise to check what information source they are using. 9 times out of 10 they pull data from all of the local MLS’s. Most of this data is valid for certain measurements, but totally in-valid for other measurements. I mentioned a few in the blog. Also to not, the MLS represents less than the entire market (sometimes less than 50%) so it is wise to consider that in any analysis.

Joe Manausa August 11, 2008 at 6:42 pm

Perfect quote Julie, it matches the real estate industry as well. The key is to understand what data is reliable and what data is unreliable. The MLS is a great source of some very reliable information, but it is also the source of unreliable information (meaning that it measures some things nicely, and some not-so-nice). Remember, the typical data-entry-person in real estate is a sales person. They have tons of work on their plate, and data entry does not pay as well for them as does client contact. Because of this, one has to be prudent when harvesting information from this as a source.

calathea August 15, 2008 at 8:12 pm

This is quite accurate. I started looking for a property with acreage at the top of the bubble and started tracking in a spreadsheet what is not available in the MLS once a listing expires. Certain properties were dropping by 10s or 100s of thousands of dollars and still not selling.

However the local newspaper was quoting the Realtor’s Association and saying that our area was not affected by the falling prices in those other places; everything was rosy, things were selling fast and for their asking price.

I realized that the reason was exactly what is described in this article. Agents relist to shorten the “time on market,” and also to lower the listing price to sales price ratio.

One example in my spreadsheet (this one was out of my league but it was a neat property so I tracked it) had three different MLS listings, started at $914,800 and ended up selling 10 months later for $745,000. However, it sold only 4 months after the latest listing and only 30,000 less than the last listing price.

Gus Wetzal September 4, 2008 at 8:07 pm

Reasons why this report are innacurate:
Tallahassee is NOT a great microcosm of the national real estate industry! As a matter of fact the market in Tallahassee has been compared to Florida’s!
For sale by owners are less than 1% of the market, therefore the average time on market scenario is flawed. Actually the average time on market would be 97-98% of asking if sellers listened to their agents! seller are actually getting 97 – 98% of what their realtor suggested!

Joe Manausa September 5, 2008 at 6:55 am

Hey Gus, thanks for the feedback. These are some good and strong statements, do you have any references to back them up?
- Tallahassee is not …. (what makes you say that?)
- Tallahassee has been compared to …. (Uh, Tallahassee is in Florida…. Read NAR/FAR reports and see why Tallahassee is considered one of the strongest markets in Florida)
- For Sale by owners are less than 1% of the market (Wrong. Blatantly, factually, incredibly wrong). Realtors in Tallahassee are right now doing roughly 65% of the business, that would make everyone else 35%. If you don’t count builders as “For Sale by Owners” that still leaves 15-20% for For Sale by Owners.
- Seller’s are getting 97-98% of what their realtor suggested – Come on Gus, you have no idea what any realtor suggested. This sounds like a pitch from a realtor lobbyist.

I love the feedback, come back any time. Just understand I don’t create my numbers, they are real.

Mike Hale October 9, 2008 at 11:16 am

The 80/20 rule has always bugged me too! Another point to note is using Median vs Average. A single property in an area without a lot of activity can really throw the averages off, whereas using Median can give you a better picture. I’ve often seen people use whichever one was more beneficial to their argument too!

Joe Manausa October 9, 2008 at 8:13 pm

Thanks Mike, I agree. Here’s one to think about. NAR (and the national media) keeps reporting about the move in “average home price” to indicate how far we are appreciating or depreciating. The trouble is, no one is measuring what an “average home” really is. What if 10 years ago it was a 1,600 square foot home and today it is a 1,900 square foot home? Can we then talk about appreciation or are we comparing apples to oranges?

Greg January 12, 2009 at 3:22 pm

In 10th grade math we are taught that statistics lie. I am always skeptical when anyone tells me statistics.

Joe Manausa January 12, 2009 at 4:02 pm

I think skepticism is a very safe way to view all things published. Thanks Greg.

Paul Chadwick April 3, 2009 at 5:32 pm

Use absorption rate as your market time gauge, this will reduce all the re-listing and time manipulation that clouds the information.
Simply take all the sales for an appropriate time frame, I would suggest either 6 months or one year, add up all the comparable sales in your target area and divide by the number of months you used.
Then pull the same demographic data set from the current actives in your MLS and divide by the number of sales per month from your first search.
Here is an example:
200 homes sold in the past 12 months that are equal to the subject.
200 divided by 12 = 16.6
16.6 homes sold per month in the past 12 months
currently there are 175 homes for sale that are equal to the subject
175 divided by 16.6 = 10.5
Based on the previous year it will take 10.5 months to clear the current inventory (this will change of course as inventory is added or subtracted).
This does not predict how any single home will perform but it will give you a guide to market averages.
In this example the average home will sell in about 157 days.

Joe Manausa April 6, 2009 at 7:32 am

Thanks Paul. Can you explain how you deduce 157 days time on the market based upon 10.5 months supply of homes?

Chris December 15, 2009 at 4:00 pm

“Plenty of other resources exist that will allow a real estate professional to study real estate market statistics.”

As a new realtor in the field, I would be interested in knowing exactly what useful statistics I can study. I have been looking for a resource to learn effective and useful statistics for residential real estate, while I keep hearing the most common ones (like the above) are not actually accurate.

Paul Chadwick December 16, 2009 at 4:20 pm

Sorry for the long delay in answering your question.
10.5 months roughly equals 315 days,so 157 is the average.As a whole half of the home will sell in less than 157 days and half more. I do use statistics when helping people to make decisions about their homes, but I go back and dig through the listing history. This is a laborious task, but as you pointed out ,if you are trying to paint a usable and accurate picture for your clients it is currently the only reliable method. (I do not have accurate statistics for FISBOS, so I do not include them) I have relentlessly lobbied my MLS to change the way statistics are reported so that Realtors can present real and truthful data.( I know there are rascals who are more than happy to misreport the true statics)
I have some innovate ways of assessing data that I have developed over the years.I want to come at a problem with as many approaches as possible. The more data you can use, the smaller the margin of error. I have tracked my data (even for properties that I did not list), and have been quite accurate with my analysis. This is not meant to be bragging, but it points out your initial theory that bad data will give you poor results.

Realtor San Francisco Bay Area April 20, 2010 at 6:49 am

Very interesting article, I think your respectable friend have right “the market is tough” and the 80/20 rule is true, but statistics are always just statistics…we don’t believe in statistics…

fikar April 27, 2010 at 7:51 am

nice article, i like it

manesh April 27, 2010 at 11:02 am

great information. enjoy read it. thks

Leave a Comment

{ 3 trackbacks }

Previous post:

Next post: