QUERIN LAW: The Time-Value of Money in Portland’s Appreciating Real Estate Market

Posted on by Phil Querin

time money“The average sales price so far this year is $299,900, up 14.9% from the same period in 2012, when the average was $261,100. In the same comparison, the median price increased 15.0% from $220,000 last year to $253,000 in the first five months of 2013.”  June, 2013 RMLS™ Market Action Report for the Portland-Metro area. [Based on May 2013 numbers.]

What Do These Statistics Mean To Sellers And Buyers? Let’s assume a 15% rolling 12-month price appreciation figure.  That translates into a 1.25% per month increase in value [15%/12 = 1.25%].  Assume that a seller listed their home at $250,000 and received a full-price offer in 30 days.  Then, assume that the transaction was subject to the buyer obtaining financing, and the closing date was scheduled for 60 days hence. This means that by the time the home closes, the seller figuratively “lost” $9,375 in equity appreciation over that 90-day period while he/she actually owned the home [1.25% x $250,000 x 3 = $9,375]. Admittedly, this is a non-scientific and rudimentary analysis.  But fundamentally, it isn’t too far from the mark when prices are rising dramatically, as they are today in the Portland-Metro area. To put a finer point on the issue, look at it from the buyer’s perspective:  A comparable home being listed for sale on the same day he/she closed would be going to market at a price $9,375 higher than the buyer paid.  In other words, the buyer realized $9,375 in equity appreciation between the date of his/her offer and the date of closing – even though he/she did not actually “own” the property.

What Do These Statistics Tell Your Realtor®?  We know that the Regional Multiple Listing Service (“RMLS™”) publishes timely and accurate information on the local real estate markets it serves.  The data comes out in the middle of each month, and is based upon transactions reported in the preceding month. This means several things:

  • It means that there is at least a 15-day lag in the numbers; this is unavoidable, and is light years ahead of other aggregators;
  • It also means that the average and mean pricing numbers are based on closed sales, which is when they first become available;
  • These closed sales originated from pricing decisions that were likely established 30 – 90 days earlier.
  • Ergo, using backward-looking numbers exclusively to make current pricing decisions, may result is below-value listing prices.   [This isn’t to say the information is inherently unreliable – just that the data is not truly “current.” It is certainly useful for spotting trends; and, admittedly, most Realtor® CMAs, rely, at least in part, upon these numbers. ]

So, what’s a hard working and conscientious Realtor® to do?  Look at current listings, that’s what!  Admittedly, these are just “asking price” figures.  But in today’s market, most homes are very close to – if not at or above – their listing price.  And since this is a statistic [i.e. ratio of closing price to listing price – e.g. 98%] that RMLS™ does make available to its members, it is something all good Realtors® should become familiar with. It gives the seller’s agent forward-looking information in establishing a listing price that may help adjust for the 60-90 day the lapse of time, and it provides the buyer’s agent with validation in establishing an offering price.

This means [to me, at least] that when listing a home in an inflating market, the offering price should be somewhat higher than what the home would have sold for based upon the prior month’s stats.  Is there a downside?  Yes; appraisers and banks are skittish.  They now examine each transaction with the enthusiasm of an overzealous TSA agent – nothing gets ignored. So getting too aggressive on pricing can result in a low appraisal and sale fail, unless the seller and buyer can reach a compromise.[1]

Additionally, a good Realtor® will keep their ear to the ground, making sure they know the pricing  trends in the community they’re working.  This means talking with other Realtors® familiar with the area and studying all new listings, in order to glean current, public and non-public information on what’s hot and what’s not.

But some statistics may constitute “outliers” – i.e. numbers that, for one reason or another, are far afield; they can distort the rest of the data and should not be relied upon to establish pricing.  For example, if a home sold for an unusually low price, there may have been personal issues, e.g. the 3-Ds: death, divorce or debt, driving the decision to sell.  Conversely, if the home sold for an unusually high number, but included thousands of dollars of seller concessions, e.g. a new roof, that statistic should be taken with a large grain of salt, as well.  Neither of these circumstances are reflected in published data; but they are important factors when deciding upon a listing price. The Realtors® active in the neighborhood may be aware of this non-public information, but few others will.

A good listing agent will know these things.  And a good buyer’s agent will too.  That way, the playing field will be “level”, both seller and buyer will have been well-served, and the final sale price will truly reflect the current market value.



[1] Section 3.1 of the OREF Sale Agreement [the state-wide Realtor® form] provides that if the bank appraisal is less than the sale price, the buyer can back out and get his/her earnest money returned.  If a low appraisal occurs, the only alternatives for the parties are: (a) Keep the sale price firm meaning that buyer will have to bring additional money to closing; (b) Reduce the sale price to the appraised value; or (c) Some combination of (a) and (b).  This should also be a cautionary tale for those Realtors® and sellers who get too aggressive on pricing.
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