Is your market hot or not? Here’s how to tell

Is your market hot? Every once in a while, local media proclaim that the local market is “on fire.” But is it really?

If the report is based solely on the fact that there have been more sales in the current period than in the previous one, then it could be terribly misleading. There’s more to a hot market than simply a pickup in transactions.

“Just like a medical diagnosis can be wrong if you are looking at just one vital sign, so can a proclamation that the market is hot — or cold, for that matter,” said Thomas Hoff of Pro Teck Valuation Services in Waltham, Massachusetts.

I asked Hoff about the key factors Pro Teck looks at to produce its monthly Home Value Forecast. He said the company watches several data points, detailed below, along with tracking trends and using consistent methodology.

The relative “hotness” of a local market is key information for its buyers and sellers. Luckily, most of the data that Pro Teck evaluates is readily available from the local multiple listing service, so your agent should be able to look at the same info and come up with a reasonable list price for your house (or how much to offer, if you are buying).

But if he or she simply uses comparables — previous sales of similar homes in your area — you might want to go elsewhere, or even try to do it yourself.

Here’s a quick rundown of Pro Teck’s key statistics:

Sales. The number of sales in a given month is important, but you want to compare it to the same month a year ago. Actually, Hoff uses a three-month, rolling average, and compares it to the previous same three months. So, if you are trying to determine whether sales are up in December, you’d look at the average number of sales in September, October and November, and compare it to the average in the period a year ago.

Active listings. Here, you want to know how many houses are on the market compared to a year ago and the percentage change.

“This is simple supply and demand,” Hoff said. “The fewer number of listings make it a hotter market; the more listings, the slower the market.”

Months of remaining inventory. This is the average rate of absorption, or houses actually sold. It is determined by dividing the number of houses on the market at any time during the previous month by the past year’s monthly sales rate. According to Hoff, an answer of five to six months suggests a balanced market. If it’s less, buyers probably should expect to pay more than list price; if it’s more, you can probably bargain. It’s vice versa for sellers.

Selling price. Determine the average selling price, again using the three-month, rolling average as compared to the same period a year ago.

Use a rolling average so your number is not impacted by a house that sold for an unusually high or low price.

“You want to get rid of spikes so outliers don’t impact your figures,” Hoff said.

Days on market. Again, using the rolling average, comparing how long it takes to sell houses now vs. a year ago. If it takes longer, the market is slower.

Active price. If the average is rising, supply and demand fundamentals “are at work,” Hoff said. But if it’s going down, there’s more supply than demand.

Active days on the market. Similarly, if the average is going down, it’s indicative of a hot market.

Sales price vs. list price. Here, you’ll want to know the ratio between what houses were listed for and what they sold for. Of course, the hotter the market, the higher the ratio. Anything above 98 is considered pretty good. But if it is trending lower, it’s not so hot.

Foreclosures. Finally, but still very important, you want to determine the number of foreclosure sales as a percentage of all sales. Five percent is healthy. But once this number rises above 10 percent, it starts to negatively impact the market.

Miami is a good example. Based on the number of sales alone, it looks like a hot market. But 12 percent of its sales are foreclosures, so prices are still depressed.

“It’s like an anchor dragging down prices,” Hoff said.