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Is the housing market as wild as it seems?

There is a lot of talk about how wild the housing market has been, including houses sold on the day of listing without any inspection and for much more than the asking price. Can we see evidence of this in the data?

This housing fervor should be reflected in the number of days that houses are on the market, which is what our FRED graph shows. We sampled three housing markets generally considered to be hot—San Francisco, Denver, and Austin—but the story is similar elsewhere. While the median days on the market are lower than usual, they’re not dramatically lower and certainly don’t show that most houses are sold unusually quickly. In fact, the typical seasonal pattern seems to persist.

Before trying to understand what’s really going on, we need to understand what the data are actually measuring. There are two ways to compute median days on the market:

  1. Take all transactions in a month, look at how long the houses were on the market, take the median.
  2. Take a snapshot on a particular day of the month, look at how long the houses currently for sale have been on the market, take the median.*

The first method takes into account all the quick sales, which is the methodology for the data shown in the graph. Here’s how the source, Realtor.com, defines the data:

The median number of days property listings spend on the market within the specified geography during the specified month. Time spent on the market is defined as the time between the initial listing of a property and either its closing date or the date it is taken off the market.

If this method includes the quick sales, why are the reported medians still high? First, the stories of quick sales may be for particular submarkets and not reflective of the overall market. Indeed, their could be a mismatch between what is offered and what is demanded. Second, there may be a cognitive bias at work that is similar to the frequency illusion: If many people are interested in a few houses, even if few or no people are interested in other houses, the perception is still that all houses are hot. A similar bias occurs on highways: They’re congested during rush hour, when many people are on them, but empty otherwise. So people think they’re always congested, whereas they’re actually almost always empty. Third, there may simply be a minimum number of days needed to close a sale and, thus, the data cannot go below that number.

* This second data methodology misses most of the quick sales, but underreports slow sales, which haven’t yet been concluded. So it may actually report a lower number of days on the market.

How this graph was created: Search FRED for “house days on market San Francisco” and make sure to take the monthly series in days. From the “Edit Graph” panel, open the “Add Line” tab and search for the Denver and then Austin series.

Suggested by Christian Zimmermann.

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