Calculating a Housing Bottom: Volume vs. Price

by: Tim Iacono

Via Jon Lansner over at the Orange County Register, here's an interesting contrast in the outlook for the nation's housing market over the next few years based on two surveys - one from real estate brokers, the other from OC Register readers.

The box in the lower right of the graphic below has been provided by yours truly to neatly summarize the findings. Not surprisingly, those in the business of selling real estate are far more sanguine than are potential home buyers and sellers.

But there is something even more interesting about this data that too few housing market watchers will immediately realize, helping to explain why the results are not all that surprising after all.

Here's the survey:
IMAGE Click to enlargeHow is this data not surprising?

As noted here before on many occasions, sales volume and sales price are two very different components of the housing market and, while home buyers and sellers are more interested in sales price, those in the business of selling real estate are surely more interested in sales volume.

Both surveys simply asked about a "housing bottom".

As a result, both survey results may prove to be correct - realtors forecasting a bottom in sales volume next year and OC Register survey respondents forecasting a bottom in sales price in 2010.

This goes back to one of those Freakonomics stories where, with just a little thought, it should become painfully clear that realtors care a lot more about making the sale than they do about the sale price.

For example if a $300,000 home is sold through a realtor, a six percent commission would result in $18,000 to be divvied up between the agents and brokers for the buyer and seller. If the sale is not made, the commission is zero. Whether the sale price is a little higher or lower has no significant impact on the commission amount, relatively speaking. What's important is that the sale is made.

Realtors will naturally think of a "housing bottom" in terms of home sales and the number of commissions they are likely to generate rather than home prices and the size of those commissions.