Market Conditions: The Adjustment for Time

A comparable’s price is what a buyer and seller agreed to on a particular day, in the market of that day. Where the market has moved since, that price no longer describes the present, and after any concession is removed, the next adjustment made to a comparable is the one that brings its price forward to the date of the analysis. It is called a market-conditions adjustment, or a time adjustment. In a moving market it is often the largest single adjustment in the grid and the one that decides whether the range is current.

The adjustment is a rate of change applied over an interval. In a segment where prices have risen six percent over the past year, a sale whose contract was agreed nine months ago is adjusted upward by roughly four and a half percent before any property comparison is made. In a segment that has fallen, the adjustment runs the other way. In a flat segment there is no adjustment, and the analysis states that the segment is flat and shows the data that supports it, rather than leaving the question open.

The date that starts the interval. The relevant date is the contract date, not the closing date, because the price was set when the buyer and seller agreed to it. A sale that closed four months ago on a contract signed six months ago reflects the market of six months ago. The contract date is the date the contract was signed by both the buyer and the seller. The listing agent records that date in the contract date field of the MLS record; the date the listing’s status was changed to pending is not the same thing, because the status change can be made days later. The contract date starts the interval. Where the MLS record does not show a contract date, the closing date is used and the analysis notes that it was. The interval runs to the date the analysis is prepared, not to the date of the most recent comparable.

Two sales show how the interval is set. The analysis is prepared in October. The first comparable closed in July, and its MLS record shows a contract date in May; its interval is five months, from May to October, although it closed only three months ago. The second closed in late June, and its record carries no contract date. Its interval runs from the closing date, late June, to October, about three and a half months, and the analysis states that the closing date was used because the MLS record does not show the contract date.

Measuring the rate: trend data from the subject’s segment

The rate comes from trend data for the segment of the market the subject competes in. That is the primary method, and the others in this lesson support it.

Segmenting the market. A market segment is the group of properties that compete for the same buyer: the same property type, a similar size range and a similar price tier, within the subject’s market area. A 2,000-square-foot colonial in a subdivision competes with other single-family homes of roughly 1,700 to 2,400 square feet in that subdivision and the neighborhoods whose sales show them selling as one market with it. It does not compete with the town’s condominiums or its 4,000-square-foot homes on acreage.

Segmentation matters because different parts of one town move at different rates. A town-wide median can rise eight percent in a year because more large houses sold, while the segment the subject sits in has been flat. A statewide or county statistic is further removed still. A rate drawn from the subject’s own segment measures the market the subject will be sold into.

Using MLS market data. The trend is read from the segment’s closed sales over a period long enough to show a direction, usually the past twelve to twenty-four months. The steps:

1. Search closed sales in the market area for the subject’s property type and size range over the period.
2. Group the sales by quarter (by month in a segment with enough sales to support it).
3. Record for each period the number of sales and the median sale price.
4. Compare the earliest and latest periods, and read the periods in between to confirm that the movement runs in one direction rather than jumping from one period to the next.
5. Convert the change to a monthly rate by dividing the percentage change by the number of months between the periods.

An example. A segment of colonials of 1,700 to 2,400 square feet in one market area shows these closed sales by quarter:

The median rose from $452,000 to $476,000, about 5.3 percent, between periods twelve months apart, and each quarter is higher than the one before it. The rate is about 0.44 percent per month. A comparable whose contract was agreed seven months before the date of the analysis, at $455,000, is adjusted upward by about 3.1 percent: $455,000 × 0.031 = $14,105, rounded to $14,100.

A median is a reasonable reading of the market’s movement when the mix of what sold stayed similar from period to period. Where the mix changed, for example where one quarter’s sales were mostly at the top of the size range, the median moves for reasons other than the market, and the analysis notes it.

The mix is checked by recording, beside each period’s median price, the median living area of the sales in that period. In the example, medians of 2,010, 2,000, 2,030, 1,990 and 2,020 square feet show houses of about the same size selling throughout, and the rise in price describes the market. Had the most recent quarter’s median been 2,250 square feet, part of its higher price would reflect larger houses selling, and the change would be read again on a narrower size band.

When there is too little data to segment. Some segments produce only two or three sales a quarter, and a median of three sales can move ten percent on one unusual sale. Where the segment is too thin to read, the data set is widened by the fewest steps that produce a usable count: a broader size range, all single-family homes in the market area, longer periods (six months instead of three), or a longer look-back. The widened data set reads the direction of the market more reliably than its exact pace, so its rate is read alongside the supporting evidence below. The analysis states which data the rate came from and why the segment alone was not used, so the reader of the file can see what the adjustment rests on.

An example of widening. A segment of ranches of 1,200 to 1,600 square feet in a small market area produced 3, 2, 4 and 3 sales in the past four quarters, with medians that moved up, down and up again by more than the market could plausibly have moved. The data set is widened in one step, to all single-family homes of 1,200 to 2,000 square feet in the market area, read in six-month periods:

The median rose $18,000, about 4.2 percent, between periods whose midpoints are twelve months apart, a rate of about 0.35 percent per month. Because the widened set includes larger houses, its rate is read against the segment’s own sale-to-list ratio and days on market, and the file records where the rate came from and why.

Supporting the trend data: the sale-to-list ratio

The sale-to-list ratio is the sale price divided by the final list price, expressed as a percentage, read for the segment period by period. It does not produce a rate on its own. Its value is that it shows whether buyers are paying more or less, relative to asking, than they were, and so confirms or questions the direction the trend data shows.

In the example above, if the segment’s sale-to-list ratio moved from 98.4 percent five quarters ago to 100.6 percent in the most recent quarter, and days on market shortened from 31 to 19, the supporting data agrees with a rising median. Where the median rises while the sale-to-list ratio falls and days on market lengthen, the evidence disagrees, and the rate is treated with less confidence. The analysis then states the disagreement and the rate it relied on.

A case of disagreement. A segment’s median rose about four percent over twelve months, but the rise came in the first three quarters, and in the most recent quarter the median was unchanged while the sale-to-list ratio fell from 100.2 to 97.8 percent and days on market lengthened from 18 to 37. A rate measured across all twelve months describes a rise that has stopped. The analysis states that the most recent quarter shows a flat market, measures the rate over the three rising quarters, applies it only to the part of each comparable’s interval that falls within them, and makes no adjustment for the most recent quarter.

Paired sales over time

Two closely similar properties in the segment that sold at different times, with any other difference between them accounted for, show the market’s movement over the interval between their contract dates. Several pairs read together can support the rate drawn from the trend data. Paired sales over time are an acceptable method. Their limitation is that truly similar properties selling at useful intervals are scarce, and every other difference between the two properties has to be accounted for before the remaining price difference can be read as time.

An example. Two capes on the same street, of the same size and condition, sold eight months apart. The first closed at $388,000 on a contract signed ten months before the analysis; the second closed at $405,000 on a contract signed two months before the analysis. The second has a deck the first lacked, and two pairs in the segment place a deck of that kind at about $5,000. With the deck removed, the second sale indicates $400,000, and the remaining $12,000 over eight months is about 3.1 percent, or about 0.39 percent per month. Read alongside a trend rate of 0.44 percent per month from the segment’s closed sales, the pair supports the trend data.

The same property sold twice, including the subject’s own prior sale

Where a property in the segment sold twice within the period, with no material change to it between the sales, the difference in price is a direct reading of the market over that interval. When the property is the subject itself, purchased by the current owner within the period, its prior sale is especially useful evidence. It is rarely available, because houses do not turn over that quickly, and any improvement made between the two sales has to be accounted for before the difference can be read as market movement. When the evidence exists, it is used to support the trend data; its absence does not weaken an analysis.

A colonial in the segment sold for $410,000 on a contract signed fourteen months before the analysis and, with no permits or listed improvements recorded between the sales, sold again for $428,000 on a contract signed two months before the analysis; the second sale has since closed. The $18,000 difference over the twelve months between the two contract dates is about 4.4 percent, or about 0.37 percent per month. The subject itself closed at $440,000 on a contract signed eleven months ago; since then the owner has painted and replaced carpet, which is maintenance and not a change the market prices separately. Its prior sale, carried forward at the trend rate, gives a reading of the subject in today’s market that the analysis sets beside the adjusted comparables. Had the owner added a bathroom in that time, the bathroom would be accounted for, from paired sales, before the prior sale could be read.

Applying the rate

The rate is applied to each comparable for its own interval, as a percentage of its price, before the property adjustments. In a market rising six percent a year, a comparable whose contract was agreed four months ago is adjusted by about two percent, and one agreed eleven months ago by about five and a half. The time-adjusted price is then compared with the subject for size, condition and the remaining differences.

At the rate from the trend example, about 0.44 percent per month, three comparables are brought forward as follows. Each adjustment is rounded to the nearest hundred dollars.

Before the adjustment, the three prices spread $21,000 from lowest to highest; after it, $7,400.

In a segment falling about 0.30 percent per month, the same Comparable C is adjusted downward by 2.7 percent, $12,100, to $434,900. The same sale indicates $464,700 in one market and $434,900 in the other, a difference of $29,800 that comes entirely from the direction of the market.

The direction of the market is established before any older sale is used, because the same twelve-month-old sale is adjusted upward in one market and downward in another. An analysis that uses an older sale unadjusted has taken a position on the market without stating it.

Condominiums, new construction and rural property

For a condominium, the segment is units of similar size and type in the subject’s complex and the complexes that compete with it; condominium prices can move apart from single-family prices in the same town, and a single-family rate is generally not applied to a condominium sale. In a subdivision still being built, the builder’s base prices are asking prices and show the builder’s trend, not sales: a base price that has risen across phases, read alongside closed sales and resales in the subdivision, shows the direction, provided upgrades and lot premiums are separated from the base. In rural markets, periods are lengthened, often to six months or a year, and the supporting evidence carries more of the weight.

How it applies. A grid with sales whose contracts were agreed nine and eleven months ago, no time adjustment, and no statement that the segment was flat has generally priced the property in last year’s market. The file answers three questions about the adjustment: what the rate is, which data it came from, and whether it was applied to every comparable for its own interval.