Real estate abstract
By gathering information regarding the total number of sales, total
number of pending listings, total number of active listings, and
total number of expired listings in a time period, a market index
may be derived. This market index can then be charted over a plurality
of periods, giving an indication of any temporal trends. The market
index can further be used to guide and determine the action of a
service provider such as a lender or title insurance company in
a proposed real estate transaction.
Real estate claims
The embodiments of the invention in which an exclusive property
or privilege is claimed are defined as follows:
1. A method of determining whether to extend financial services
to a party in a particular commodity market, comprising the steps
of:
(a) using computing means having a central processing unit to gather
from a first data source a total number of closed sales, S.sub.c,
in a particular commodity market in said period;
(b) using said computing means to gather from a second data source
a total number of sales which are pending, S.sub.p, in said particular
commodity
market in said period;
(c) using said computing means to gather from a third data source
a total number of expired listings, L.sub.e, in said particular
commodity market in said period;
(d) using said computing means to gather from a fourth data source
a total number of active listings L.sub.a, in said particular commodity
market in said period;
(e) determining a market index, M.sub.i, indicative of the strength
of said particular commodity market over a period consisting of
a length of days, P.sub.d, in accordance with ##EQU8## and (f) extending,
terminating or repositioning said financial service to said party
if said market index is above or within a predetermined threshold
of market activity.
2. The method of claim 1, including the step of repeating steps
(a) through (e) for a plurality of said periods, and graphically
representing in temporal sequence the plurality of market indices,
M.sub.i, of said plurality of periods and extending said financial
service if said market indices remain above said predetermined threshold
over a predetermined time period.
3. The method of claim 2, wherein all of said data sources are
a multi-listing service (MLS) database.
4. The method of claim 1, wherein said financial service is the
extension of credit or directly or indirectly insures the performance
of the borrower.
5. The method of claim 1, wherein said financial service is the
extension of title insurance.
6. The method of claim 1, further comprising the step of dividing
said market index, M.sub.i, by the average marketing length, A.sub.m,
required to sell the properties included within the tabulation of
S.sub.c and S.sub.p.
7. The method of claim 1, further comprising the step of multiplying
said market index, M.sub.i, by the ratio of the average selling
price of the properties included within the tabulation of S.sub.c
and S.sub.p in said period and the average selling price of the
properties included within the tabulation of S.sub.c and S.sub.p
in the preceding period.
8. A method of determining whether to extend, terminate or reposition
financial services in a particular commodity market to a party comprising
the steps of:
(a) using computing means having a central processing unit to gather
from a database: the total number of closed sales in said period,
S.sub.c ; the number of sales pending in said period, S.sub.p ;
the number of listings which have expired in said period, L.sub.e
; and, the number of properties actively listed, L.sub.a, at the
end of said period;
(b) calculating a total number of listed properties in said particular
commodity market, T, in accordance with the equation: T.sub.l =S.sub.c
+S.sub.p +L.sub.e ;
(c) determining the total number of successfully marketed properties,
T.sub.s in accordance with the equation: T.sub.s =S.sub.c +S.sub.p
;
(d) determining a demand index, D, as being T.sub.s divided by
T.sub.l ;
(e) calculating a rate of absorption, R.sub.a, as being T.sub.s
divided by a length of days, P.sub.d to be monitored;
(f) calculating a supply level, S.sub.i, as a ratio of L.sub.a
divided by R.sub.a ;
(g) calculating a market index indicative of the strength of the
particular commodity market over P.sub.d, as the ratio of D divided
by S.sub.l ; and
(h) extending said financial service to said party if said market
index is above a predetermined threshold.
9. The method of claim 8, including the step of repeating steps
(a) through (g) for a plurality of said periods, and graphically
representing in temporal sequence the plurality of market indices,
M.sub.i, of said plurality of periods and extending said financial
service if said market indices remain above said predetermined threshold
over a predetermined time period.
10. The method of claim 8, wherein said financial service is the
extension of credit.
11. The method of claim 8, wherein said financial service is the
extension of mortgage or title insurance.
12. An apparatus for calculating a market index, M.sub.i determinative
of whether to extend financial services in a particular commodity
market including:
(a) means for interfacing with a database to gather from the database:
the total number of closed sales, S.sub.c, in said market in said
period; the total number of sales which are pending, S.sub.p, in
said market in said period; the total number of expired listings,
L.sub.e, in said market in said period; and, the total number of
active listings, L.sub.a, in said market in said period;
(b) computing means receiving from said means for interfacing said
S.sub.c, S.sub.p, L.sub.e, and L.sub.a parameters and generating
the market index, M.sub.i, determinative of whether or not to extend
financial services, wherein financial services will be extended
if said market index is above a predetermined threshold, said market
index M.sub.i being indicative of the strength of the particular
commodity market over a period consisting of a length of days, P.sub.d,
said computing means calculating said market index, M.sub.i, in
accordance with ##EQU9##
13. The apparatus of claim 12, wherein said financial service is
the extension of credit.
14. The apparatus of claim 12, wherein said financial service is
the extension of title insurance.
Real estate description
TECHNICAL AREA
This invention is directed towards market analysis and, more particularly,
to a method for determining whether to extend credit or provide
insurance to a purchaser in a real estate market using sales data
regarding that market.
BACKGROUND OF THE INVENTION
The real estate market of the United States can be volatile and
uncertain due in part to effects from many external factors. For
example, the strength of the local economy, seasonal variations,
inflation, interest rates, and other factors all influence the direction
of the real estate market. Further, the real estate business is
important to the general welfare of the public, with hundreds of
thousands of jobs directly related to the housing industry. These
include real estate agents, construction workers, bankers, architects,
engineers and developers; all of whom rely upon the real estate
market for their livelihood. For many of the rest of the population,
a real estate purchase represents the single largest investment
of their lifetime.
Thus, given the importance of the real estate market, it would
be prudent to accurately monitor the relative strength or weakness
of a real estate market on a local, regional and national basis.
This ability would directly benefit not only those people who are
responsible for management of and strategic planning for companies
active in the real estate industries, but also all of those who
are involved with the purchase of real estate. In addition, in order
for banking institutions and other lenders to make a reasoned determination
as to whether the extension of credit to a purchaser of real estate
is prudent, it is important for these lenders to accurately gauge
whether the overall market strength is increasing or decreasing.
Similarly, other service organizations such as mortgage and title
insurance providers require the same accurate information in order
to make their insurance decisions.
Although a number of sources periodically publish various items
which can be indicative of activity in parts of the real estate
market, such as mortgage interest rates, inflation rates, and/or
housing starts, to a vast majority of the population, these figures
are relatively narrow and limited in their focus. Moreover, although
for a given market, multiple-listing services (MLS) compile various
figures as to the selling price of various properties, and other
types of numerical data, similarly, these figures are not singularly
informative as to the overall strength of the housing market. Nor
do they provide a standardized method for comparing different market
segments or market locations.
Over the past decade U.S. banks as well as government and private
insurors suffered substantial losses related to loans on real estate.
If given a standardized system of tracking the strength of our nation's
real estate markets in years past, it is probable that the extent
of losses attributable to real estate loans would have been considerably
lower. For example, the banks could have used the method and apparatus
of the present invention to guide their lending decisions.
The method of the present invention as described herein provides
a technique for monitoring the strength and trends of a real estate
market, whether nationally or locally. Based upon data gathered
from the real estate brokers' Multiple Listing Service (MLS), an
index which is indicative of the strength of a market may be generated.
From a sequence of these indices, the relative strength (trend)
of the market can be obtained. Further, real estate service providers,
such as governmental or private mortgage entities could use the
indices to guide their business decisions.
The method of the present invention can also be used to monitor
the strength and trends of other markets. Exemplary, but non-limiting
examples may be the market for used yachts or airplanes, providing
sufficient market data records are maintained.
SUMMARY OF THE INVENTION
In accordance with the present invention, a method of ascertaining
the strength of the whole or a particular segment of the real estate
market is provided. The method includes the gathering of sales figures
for the part of the market in question over a specified period.
The data acquired for a given period includes: all real estate sales
which have closed in that period, S.sub.c ; pending real estate
sales at the end of that period, S.sub.p ; listings which have expired
or were withdrawn, canceled or taken off the market for any reason
other than a sale during that period, L.sub.e ; and, actively offered
real estate listings at the point in time at which the data sample
is obtained, L.sub.a. By summing together all closed sales, S.sub.c,
all pending sales, S.sub.p, and expired listings, L.sub.e, a total
number of properties listed, exposed to the market, then removed
for any reason, whatsoever, whether it be sale, expiration, withdrawal,
etc., T.sub.l. Similarly, by summing all closed sales, S.sub.c,
with all pending sales, S.sub.p, a total of all those successfully
marketed properties is available, T.sub.s. A demand index, D, is
derived as the ratio of successfully marketed properties, T.sub.s,
over total listed properties, T.sub.l. The lower the ratio, the
lower the demand. The higher the ratio, the higher the demand. Similarly,
a rate of absorption, R.sub.a, is obtained by dividing the successfully
marketed properties, T.sub.s, by the number of days in the period,
P.sub.d. A supply level, S.sub.l, is derived from the ratio of total
active listings, L.sub.a, by the rate of absorption, R.sub.a. Next,
a market index, M.sub.i, is obtained by dividing the demand index
by the supply level. For purposes of readability, a multiplier of
10,000 (or 100,000) is applied to the "raw" market index.
Note that supply is measured in terms of time, i.e., based upon
the rate of absorption calculated. There is a certain number of
days of supply. Thus, supply reflects not the number of listings,
but the amount of time that the current listing inventory will take
to be absorbed by the market based upon the historical rate of absorption
of the data sample under study.
In accordance with further aspects of the present invention, the
market index, M.sub.l, may be determined and charted over a plurality
of periods to obtain an indication of any temporal trends in the
analyzed market segment.
In accordance with still further aspects of the present invention,
a risk index R.sub.i, may be obtained by dividing the supply level,
S.sub.i, by the demand index, D.
In accordance with still further aspects of the present invention,
the market index, M.sub.i, may be modified such that the average
selling price of a property in the market is taken into account
by multiplying the market index, M.sub.i, by the ratio of the average
selling price of a property in the current period over the average
selling price of a property in the preceding period.
In accordance with still further aspects of the present invention,
the market index, M.sub.i, may be modified such that changes in
the pace of market activity are included. The market index, M.sub.i,
is divided by the average length of time needed to sell a property
in the market during the period.
In accordance with still further aspects of the present invention,
the market index is used by a lending institution to determine whether
or not to extend credit.
In accordance with still further aspects of the present invention,
the market index is used by mortgage or title insurance entities
to determine whether or not to extend insurance coverage.
Further features and advantages of the invention will become apparent
during the course of the following description in which reference
is made to the accompanying drawings, and which is provided purely
by way of nonrestrictive example.
BRIEF DESCRIPTION OF THE DRAWINGS
FIG. 1 is a flow diagram of the method of the present invention;
FIG. 2 is a chart of market indices, M.sub.i, the chart formed
in accordance with the present invention;
FIG. 3 is a schematic diagram of the apparatus used in conjunction
with the present invention; and
FIG. 4 is a chart showing differences in market indices, M.sub.i,
for different geographic segments of the condominium market in the
Pacific Northwest.
DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENT
With reference to FIG. 1, at box 11, a segment of the real estate
market to be analyzed is identified. In this regard, a segment can
be defined either geographically, such as a state, region, city,
or neighborhood, or as a residential property type such as new home
construction, condominiums, waterfront homes, multi-family dwellings,
etc., or a commercial property type such as retail stores, industrial
plants, warehouses, etc. The only prerequisite for choosing a segment
is the availability of data regarding sale and listing activity.
At box 11, a time period is chosen, over which the analysis is
to be accomplished. The period can be defined as the length of time
over which sales activity is to be measured; the period may be chosen
to be any length of time. During normal residential real estate
market activity, the compilation period typically would be one year
with the market index M.sub.i. calculated each month based on data
gathered over the past twelve months. The time period between calculation
of M.sub.i may be longer. Alternatively, if desired, for instance
during market volatility, compilations may be made more frequently,
for example semiannually, biweekly, weekly or even daily.
The raw data required for the method of the present invention can
normally be obtained from a real estate broker's multiple-listing
service (MLS) or a realtor's association. Most geographical regions
of the United States have an MLS which tracks and compiles information
regarding the real estate market of the area. Information regarding
the sales of property and active property listings are typically
maintained as part of a database. The data required can be extracted
without difficulty from the MLS database using the appropriate computer
search. In particular, a personal computer with a central processing
unit and random access memory (RAM) may be used to interface with
the MLS database in order to extract the desired data.
After the segment of the market and time period have been identified,
at box 13, the relevant data for the segment to be analyzed is gathered.
Specifically, the four data variables gathered are: (1) all completed
and closed property sales during the period, e.g., during the last
twelve months, S.sub.c ; (2) all property sales still pending (not
yet completed escrow) at the end of the period, S.sub.p ; (3) all
properties on the market which have not sold and where the original
listing agreement between the broker and the seller has expired
(known in the art as "expired listings") during the period,
e.g., during the last twelve months, L.sub.e (alternatively, the
listings cancelled and listings withdrawn may be added to the listings
expired); and, (4) total number of properties which are still active
at the end of the period, L.sub.a.
By way of further explanation, assume that the period chosen is
one year, i.e., 365 days. Then, S.sub.c would be defined to be the
number of sales in a segment which were completed and closed during
that one-year period. Similarly, L.sub.e is defined to be the total
number of property listings which have expired during that one-year
period. With respect to the number of pending sales, S.sub.p, this
figure is the total number of sales in which an earnest money agreement
has been executed but the transaction has not yet completed the
escrow process. Finally, L.sub.a is the total number of properties
that are active listings, i.e., those listings currently available
at the time the data sample is taken.
At box 15, the sum of S.sub.c, S.sub.p, and L.sub.e is obtained
to provide a measure of the total number of listings which came
to and left the market during the period, T.sub.l,. Similarly, at
box 17, the sum of S.sub.c and S.sub.p is determined to find the
total number of properties successfully marketed, T.sub.s. From
these figures, at box 19, a demand index, D, may be found as the
ratio of Ts divided by T.sub.l.
A useful tool for measuring the absorption rate of properties in
the real estate market may be obtained by dividing the properties
successfully marketed, Ts, by the number of days, P.sub.d, in the
chosen period. This gives a rate of absorption, R.sub.a, in properties
per day, which is calculated at box 21. From this rate of absorption,
R.sub.a, a supply level in terms of days, S.sub.l, is determined
at box 23 by dividing the total number of active listings, L.sub.a,
by R.sub.a.
At box 25, a market index, M.sub.i, which is an indicator for the
specific period analyzed of the strength of the segment, is calculated
by dividing the demand trend, D, by the supply level, S.sub.i. Typically
the numerical value of M.sub.i is on the order of a few hundredths
of a point; therefore, to aid in the readability of the market index,
M.sub.i, at box 27, M.sub.i, is multiplied by a factor of 10,000.
It can be appreciated, however, that this last step is not required.
Although the description of the preferred embodiment details the
calculation of the market index, M.sub.i, as a plurality of individual
calculations using the available sales data, it will be appreciated
by those skilled in the art that the market index, M.sub.i, may
be equivalently stated as: ##EQU1## Thus, whether the market index
figure is achieved by following the description of the preferred
embodiment as referenced to FIG. 1, or by the equivalent equation
shown above, the resulting market index, M.sub.i, is identical.
With reference to FIG. 2, the market indices, M.sub.i, for a plurality
of periods are charted on a standard X-Y grid. The X axis represents
a time sequence whereby each period in which M.sub.i was calculated
is charted. The Y axis is a relative scale for the magnitude of
M.sub.i. Thus, as can be seen, by charting M.sub.i as determined
from the method of the present invention, a temporal indication
of the trends in the analyzed segment may be obtained. In the particular
chart illustrated in FIG. 2, the data sample period chosen is one
year and the market indices, M.sub.i, for a geographic region in
the Seattle, Wash. area are charted each month from August 1988
to January 1991.
To provide an example of the foregoing method, the market indices
corresponding to December 1988 in FIG. 2 will be calculated. As
of December 1988 the following data for the prior 12 months of the
specified market segment existed:
(1) All completed and closed property sales during the 12-month
data sample period, S.sub.c : 2,690;
(2) All property sales pending as of December 1988, S.sub.p : 357;
(3) Expired listings during the 12-month period, L.sub.e : 530;
(4) Total number of properties active as of December 1988, L.sub.a
: 271.
As depicted in box 15 of FIG. 1, the number of sold, pending and
expired (including withdrawn, canceled or any type of removal from
the market prior to sale) listings (S.sub.c, S.sub.p and L.sub.e)
is summed to obtain a measure of the total listings on the market
during the past 12 months, T.sub.l. ##EQU2##
In a next step depicted in box 17 of FIG. 1 and set forth below,
the total number of sold and pending transactions are added together
to give a representation of the number of properties successfully
marketed over the past 12 months, Ts: ##EQU3##
Next, as depicted in Step 9 shown in FIG. 1, the summation T.sub.l,
is divided by the summation T.sub.s provides a ratio that reflects
a percentage of properties that were listed and successfully marketed
during the past 12 months. This is a reflection of demand. In the
present sample, as set forth below, about 85% of the listings that
came on the market over the past 12 months were sold while 15% expired.
##EQU4##
The average number of sales per day is next calculated. This provides
a rate of absorption, R.sub.a, of the properties on a daily basis.
##EQU5##
From the rate of absorption, R.sub.a a supply level in terms of
days, S.sub.l, is determined by dividing the total number of active
listings, L.sub.a by R.sub.a. ##EQU6##
As depicted in box 25 of FIG. 1, the market index, M.sub.i is calculated
by dividing the demand index, D, by the supply level, S.sub.l. As
shown by the following calculation, the market index as of December
1988 was 0.0262. This number is typically multiplied by 10,000,
see box 27, to provide a more easily readable graph number, i.e.,
262. ##EQU7##
The market index of 262 is depicted in the graph of FIG. 2. Similar
calculations are typically made over time to provide an indication
of the trends in the market segment being tracked. It is to be understood
that the foregoing calculations could be carried out in essentially
one step by utilizing the Equation (1) set forth above.
As the market strength rises to a peak period, that is very high
demand and very low supply relative to typical market activity,
it would be prudent for those institutional and governmental participants
who bear the burden of risk as a result of real estate lending such
as FDIC, mortgage insurance companies, FNMA, and mortgage lenders
providing recourse for their paper to make their underwriting criteria
more stringent. It is during these market peaks where volatility
generates transactions that are consummated at prices above a level
that longer term price trends in a market tend to support. Thus,
lending institutions and governmental or private sector insurors
who utilize this development will probably reduce their risk and
non-performing loan burdens substantially.
Also, even without market volatility there are segments in any
real estate market that will create greater and lesser risks to
those bearing the financial burden of real estate loans. This is
illustrated in FIG. 4 detailing differences in geographic segments
of the condominium market in the Pacific Northwest. This information
can be used by the FDIC, mortgage insurance companies, etc. to determine
whether to enter into a transaction pertaining to real estate in
a particular market segment.
Further, as shown in FIG. 3, to facilitate determining the market
indices, M.sub.l, a commercially available calculator or computer
having a central processing unit 30 may be used, and the resulting
calculations stored in an electronic memory device 32, for instance
on a floppy disk, "hard disk", punch tape or cards, all
of which are standard articles of commerce. The resulting calculations
may be displayed on a visual output device 34, such as a commercially
available LCD or LED display or printed or plotted on paper with
a commercially available printer/plotter 36. Moreover, the data
used in determining M.sub.i may be also stored in an electronic
memory device 38 of the types discussed above.
In the foregoing example, the data collected over a twelve-month
period was utilized. Using this time interval has the advantage
of possibly averaging out variations of real estate sales and/or
listings based on normal seasonal fluctuations. However, the compilation
time period can be over a different length of time as long as sufficient
data is available to provide realistic values for the data variables
used to calculate the market index, M.sub.i and the other indices
of the present invention. For example, it may be desirable to utilize
the intervals of six months or even one month, especially if it
is desirable to take seasonal variations into consideration or if
the market being analyzed changes very quickly.
In another preferred embodiment of the present invention, a risk
index, R.sub.i, may also be calculated and charted to give an indication
of the relative risk of investing in the segment under analysis.
This method is substantially similar to the above embodiment except
that, at box 25, a risk index is calculated as the supply level,
S.sub.i, divided by the demand index, D. As in the preferred embodiment,
R.sub.i may also be charted over a period of time to give an indication
of any temporal trends present.
In much the same way the market index is used by real estate service
providers, the risk index may similarly be used. In particular,
if the risk index is below a predetermined threshold or period of
volatility, then the service provider, i.e. a lender or title insurance
company, will proceed with the transaction. However, if the risk
index is above a predetermined threshold, then the service provider
or insuror may opt to impose stricter underwriting guidelines when
servicing business in the markets or market segments identified
by this development as higher risk situations.
In another preferred embodiment of the present invention, the market
index, M.sub.i, may be modified such that the average selling price
of a property in the segment is factored therein. Specifically,
a first market index in accordance with the present invention must
be determined; then, for a following period, the calculated market
index, M.sub.i, is multiplied by the ratio of the average selling
price of a property in the second period over the average selling
price of a property in the first period. This modification is done
on each succeeding period, with the price change modification accomplished
using price data of the current period compared to the price data
with the previous period.
In another preferred embodiment of the present invention, the market
index, M.sub.i, may be modified such that changes in the "pace"
of market activity are included. The pace of market activity is
defined as the average marketing time (time between listing and
sale) of all properties which have been sold (either closed or pending)
during the period. This can be accomplished by first gathering information
(obtainable from MLS database) regarding the average marketing length,
A.sub.m, of a property, and then dividing M.sub.i by A.sub.m.
In another preferred embodiment of the present invention, the market
index, M.sub.i, may be modified such that the expired listings component
can be expanded upon to include expired, withdrawn, and cancelled
listings.
While the preferred embodiment of the invention has been illustrated
and described, it will be appreciated that various changes can be
made therein without departing from the spirit and scope of the
invention. Specifically, although the preferred embodiment has been
described with respect to a real estate market, the method and apparatus
of the present invention is equally applicable to a market for a
commodity. For example, the market for airplanes and large boats
may be tracked. It can be appreciated that data regarding the commodity
analogous to the sales data described above with regard to the real
estate market is available. Thus, within the scope of the appended
claims, it is to be understood that the invention can be practiced
otherwise than as specifically described herein. |