Question on the Arithmetic

[Dave T]

In Dan Auito's article on this site, The Three to Five Year Holding Plan, he has some arithmetic that I don't understand.

Dan says that a population density of 1 million, will occupy approximately 400,000 dwelling units on the average.  He further suggests that in any given year, 57600 of these dwelling units will be bought and sold.

He claims that when you reduce these numbers, this works out to an annual transfer rate of 6.94 houses per hundred.  I don't get the arithmetic.  My calculations give me 14.4 houses per hundred.

57600/400000 = 14400/100000 = 14.4/100

Can someone confirm the arithmetic for me?

[henryinma]

That might be right because 57600 sounds like it represents the number of sides that are transacted. A seller and a buyer counts as two sides, but there's only one house involved in the transaction. Sounds like just some poorly worded numbers as 57600 seems to indicate total number of units whereas bought and sold seems to talk about the number of sides.

[tedjr]

Howdy Dave:

Your numbers are correct. Pretty sharp to catch his error. He divided 400000 by 57600 which would be the wrong fraction.

[xx]

I wouldn't buy "that" book...lol

[VickyS]

This still poses a question.

The original post used a ratio to come out with 14.4.  I understand the idea that there are 2 sides to every transaction, but that being the case, we have some homeless people because half of 14.4 is 7.2 not 6.9!

[Dave T]

VickyS,

The 6.94 number contained in the original article was derived with faulty arithmetic.  

The fact that there are two sides to every transaction is a distraction to the discussion.  I'm just glad that noone pointed out that each seller also becomes a buyer in the next transaction.  Imagine the fun we might have by hypothesizing that there are three unique sides to every two transactions (A buys from B, then B buys his replacement house from C -- three parties, two houses -- just like a 1031 exchange).  

In each completed transaction, there is going to be a buyer for every seller.  If 57600 houses change hands every year in this hypothetical population, the constant is that the number of property transfers for every 100 houses will average 14.4 per year.

If you want to explore these numbers further, you may find the following an interesting coincidence.  Given that for this population of 1 million residents, we average 2.5 occupants per house.   If 57600 houses change hands every year, then 144000 people will be moving each year.  In this population of 1 million, the number of people moving each year will also average 14.4 per 100.

144000/1000000 = 14.4/100

[niravmd]

how is this relevant to investing? [not being sarcastic, trying to see what i'm missing]

[Dave T]

Ok, I agree that this thread may seem tangential to the business of real estate investing.  The business of real estate is not confined to just buying and selling a property.  Sometimes, it is about timing your market, determining demographic patterns, and quantifying sales activity to suggest the speed at which a specific market is growing as evidenced by real estate sales.

This thread was all about the arithmetic to quantify metrics for a market.  If your particular market has sales per 100 that exceed the norm, then your market is heating up.  If your market metrics are a little lower than the norm, then your market is softer than usual.  Given the flexibility to time my market, I would want to sell into the rising phase of a market cycle rather than well into the declining phase.  If you have to sell, then knowing your market may help you establish a probable sale price rather than just relying on recent comps.

For example, last year I wanted to sell a townhouse I owned in an out of state market.  The recent comps for similar properties in the same neighborhood had sale prices between $182Kand $193K.  If I had just relied upon the comps, I would have priced my property at $189900.  When I looked at the market metrics, I saw that my property was in a hot market.  

I therefore priced my property at $209900 and got a full price offer within 5 days.  It appears that I was able to sell just at the market peak.  More recent activity in this same market is slower that it was just six months ago.  In this current market, I might have to price a property at $150K for a reasonably quick sale even though comps for the past six months show sales between $159K and $167K for a similar property.

Robert Campbell has written a book about timing the real estate market that discusses different metrics that you can use to determine where your local market is in the business cycle.  It helps me make better business decisions when I understand the reasoning behind the arithmetic of market metrics

[niravmd]

Robert Campbell has written a book about timing the real estate market that discusses different metrics that you can use to determine where your local market is in the business cycle.  It helps me make better business decisions when I understand the reasoning behind the arithmetic of market metrics

Hey I know that dude! He also has a market timing newsletter.
He's a really great guy. check out his website
www.realestatetiming.com

thanks for the reply david.

[thornhillhomes]

Just to be a smart alec, I've got to ask this question..

If you bought several houses, and then rented them out, how would that affect the ratio becuase we then become a landlord???

OK, OK  I'll take my chair and go sit in the corner...Now class, this is what happens to the CLASS CLOWN!!!

[Dave T]

Well, duh.  Doesn't matter what you do with the property.   Buy it and live in it for seven years, or buy it and use it as a rental for seven years.  

If you BUY several properties to use as rentals, then you are participating in some of the 57600 property transfers that are expected to take place during the year in this hypothetical scenario.

Now, go back to your corner.

[stevec]

this works out to an annual transfer rate of 6.94 houses per hundred.

Whether the math was faulty or not, that ratio of turnover is very accurate, at least it is in Austin TX. I would suppose it would hold up in most cities also. Most neighborhoods are going to see 3% to 9% turnover per year on average.

How it relates to investing is that supply and demand affect pricing and therefore appreciation. All things being equal, I'd rather have a long term hold property in a low turn area. On the other hand, if it's an emerging area where junkers are being rehabbed and resold to owner occupants, high turn can be a good thing.

The turn rate has to be viewed in the context of the greater market and understanding what forces (or lack thereof) are causing the turn rate.