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ERC "Supply" Calculation

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Laughing Heir

Thread Starter
Senior Member
Joined
Oct 16, 2007
Professional Status
Certified General Appraiser
State
Pennsylvania
I have been helping with market analysis on ERC assignments and am stumped on this portion of it. I posted on 'supply' months ago and found out that ERC's formulae describes inventory rather than supply.

So...using the relocation council's formula:

AR = the number of sales in the market area divided by the term (12 months in this case).

S = number of active listings divided by the AR. This results in the months it would typically take to absorb the current inventory if factors are static.

My question is:

Can I get a consensus on whether it would be meaningful to compare it year over year. And, if the analyst could establish a trend, would this actually be a method to substantiate an oversupply claim in the appraiser's market analysis.
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For example:

The effective date of the assignment is 01/04/2008.

01/01/2007 to 12/31/2007 there were 240 sales of single-family residences in the subject's market area. This indicates an absorption rate of 20 units per month. As of the effective date there are 300 'active' listings in the MLS. Using the ERC method this would indicate an inventory of 15 months 'supply'.

01/01/2006 to 12/31/2006 there were 320 sales of SFR in the same market area. The absorption rate is 26.6 (27). *Here's the part that stumps me* Comparing it to the 300 active listings as of the effective date, this would result in an inventory that would last for about 11 months.

01/01/2005 to 12/31/2005 almost the same market activity for 2006. Approximate # of sales is the same, AR is the same, inventory is the same.

So, historically I can prove that properties are being absorbed at a lesser rate than in 2005 and 2006. The only thing I cannot prove with this analysis is the number of listings that were active any given time other than the effective date. Is this flawed logic?
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In my opinion, at a very basal level, this clearly illustrates an upward trend in inventory and declining market conditions. Would it be proper to compare prior years sales to the current number of active listings to determine an oversupply?

Based on research of other posts about supply, I understand that the ERC prescribed formula does not accurately describe supply and instead calculates the inventory. Many other economic and demographic factors should be considered when determining the amount of supply, but, is this a simplified way to determine if a market area might be headed for troubled waters?
 

Tawfik Ahdab

Senior Member
Joined
Feb 19, 2003
Professional Status
Certified Residential Appraiser
State
Oregon
Laughing Heir,

The method used by the ERC is the one most commonly in use.

Active listings as of a certain date divided by the sold vlume in the prior 12 months = years supply.

Years' supply X 12 = Month' supply.

To make sense of the changes in the months' supply, you need to track it on a regular basis. I do it quarterly, meaning I look at the active listings at the end date of each quarter, and especially at the end of the year to determine the changes in months' supply.

If you would like a sample of how I handle this analysis in my work, please email or PM me with your email address.
 
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