Have you ever wondered why the average Days on Market (DOM) number from your local MLS never feels right? Why the MLS always seems to paint a rosier picture than reality? That’s because it’s not right! Sometimes it’s off by a little; other times it’s off by a mile. But it’s never accurate.
Before writing this article, I thought I would pull the latest DOM figures from my local MLS and compare that statistic with the actual calculated DOM. The latest number as reported in my MLS is 77 days. However, when I calculated DOM using the absorption method, the actual average DOM is 240! And believe me, your MLS is off as well — maybe not by as much as mine, but it is typically off by more than 50%.
So why the huge disparity? Because the MLS calculates the average DOM as the average days on market for the listings that actually sold. What it leaves out of its calculation altogether are homes that were withdrawn, listings that expired, listings that were withdrawn for a day and then re-listed to restart the clock, or those that were never put in the MLS until they sold (like new construction where they might list only one home in a subdivision, but actually have 20 for sale). And all of those affect the reported DOM.
But it’s very important to know the actual DOM as a real estate professional. Why? It will help you guide your clients. Your buyer client might want to assess whether or not to make a low offer based on how long a home has been on the market, compared to what the average DOM is for that market segment.
Or your listing client might want to evaluate the job you’re doing in selling his home. What if you told him the average DOM was 77 and it was actually 240. When day 90 rolled around, do you think he might be getting a little frustrated? Absolutely! If you had given him the actual DOM, his expectations would have been much different.
So how do you calculate true DOM? It’s never been easier. Here’s how you get the real DOM. Find out how many homes sold in your market in the last 12 months and how many are currently on the market. Using my example, 5,855 homes sold, and there are currently 3,904 homes on the market. That means the current inventory level turned over 1.5 times in the last 12 months (5,855 divided by 3,904 = 1.4997).
Now, for statistical purposes let’s assume 360 days in a year, so 360 divided by 1.5 = 240, which is the true average days on market. If you want to get legalistic and use 365, it makes the DOM 243. In other words I should expect an average home to sit on the market for about eight months. Now how simple was that?
Well it gets even easier. We developed a free calculator for our agents to compute the actual days on market for a city, a neighborhood, a price tier, or whatever. And you’re welcome to use it too, so check it out.
Note: To use this calculator, enter the number of units sold in the last 12 months in your market or market subset, then enter the number of active listings for the same market or market subset. You may also use a shorter time period as long as you annualize the result. For example, you might use the last 3 months sales data multiplied by 4 to represent a full 12-month period.