Question about oversupply

[Mary Tiernan]

rural versus urban oversupply

Recently did a rural property where I had no choice but to check oversupply - last sale in the area was in december 2004, 14 current listings, ranging $14,000 to $134,000. i did not check declining values, however, stated that an overabundance of current listings would indicate . . . blah blah blah that values may go south, however, inadequate market data pre-empted me from checking the dreaded declining box.

Had a realtor tell me there was an oversupply of listings in my area - I analyzed and determined that it is typical of this area - with seasonal trending, many homeowners place their properties on the market only during the selling season. Had to analyze the market for the past three years and add data to addendum as I did not want this to come back and bite me. The appraisal was for a short sale - and he was trying mighty hard to get the offer through.

In my rural market, it is typical to go back two years for reliable indicators of value - so it would seem to me that it should be typical to analyze further than 30-60 days in determining if the market is going sour, one sale does not make the market here, so many out of town buyers, and one month does not indicate a trend.

 

[Richard Carlsen]

Never look at an over-supply condition with dread. It is a fact of the market. I have been checking over-supply on almost every property I've done for the past 8 months or so. Never a squawk from an UW. You have nothing to fear in a report when you are simply reporting the facts.

One must also remember that a balanced market is one that is in a slightly over supplied condition. If normal exposure time is 6 months, then a balanced market would normally have 6 to 8 months supply of housing. This compensates for the normal withdrawls, cancellations etc. that occur as well as not permitting the market to get into an under-supply condition.

 

[Austin]

What Is Over Supply

From the texts on market analysis, based on the problem as Rae described is not an 11 month supply of houses. Appraisers are doing that wrong if they use that method.
The system works like this: There should be a normal frictional vacancy factor like 5%. It is a buffer to allow interim shifting around of families to insure everyone has a place to live. This ratio should remain constant meaning if 1000 new households are added every year, then 1,000 more dwellings need to come on line every year and at the end of the year the frictional vacancy should always be 5%. That is absorption. If the % drops well below 5% and there is no projected increase in households, then you have an over supply. It is based on the expected rate of absorption. The absorption of existing supply defines oversupply.
The reason I say most appraisers that come to the conclusion that there is an 11 month supply of houses is because dividing the number of monthly sales into the inventory of houses without addressing the rate of household formation numbers does not equal an absorption rate. An 11 month supply of houses can only be determined by using the rate of household growth. For example, if there are 1,100 houses in inventory and there are 100 new households moving into the area, then that is an 11 month absorption period. You cannot have an absorption period without something being absorbed. You could have an inventory of 1100 houses with no population growth and there would be no absorption rate. To state that there is an 11 month supply is just plain misleading because you don't know if it is or not.
The reason most residential appraisers do it wrong is because it is defined that way on the ERC form. The ERC form basically is asking an incorrect question. I have pointed this out before on this forum and the typically reply is: "Why rock the boat. If they want the wrong answer, then give them the wrong answer." Given the state of appraisal regulation at present, that is correct answer if you want to survive.

 

[xm39hnu]

So how do you tell whether sales were truly absorbed? Did that last sale result from Jim Bob moving out of Daddy's house? Or did it result from somebody moving into the county? Either would be absorption. If it was the result of somebody moving out of the area, and somebody else moving in, there is no net absorption.

But were do you get the data to make this determination?

I agree with the ERC's take on it: It doesn't matter from a liquidation standpoint whether your property is bought by the new guy in town or by someone who just wanted to be closer to the school or golf course. It sold, and that's what they want to know.

But I like correct terminology, too. What would you call these events if "absorption" got to be the next appraisal buzzword?

 

[Austin]

Residential Market Is About Households

It does not matter where the new households come from. Some are formed when people marry, some when they divorce, some when people move into the area. The significance is the rate of household formations as it relates to the market for dwellings. Demand is determined by the number of households and their ability to purchase. The purpose of market analysis is to find all of this out. USPAP required a market analysis. Every residential appraisal I do contains the housing value report for the census tract with the present and projected numbers. It also shows the date houses were constructed, the length of residency, and the percentage of turnover by year.
You get the information from demographic sources and keep up with what is going on. For example, the headline this morning in our local paper is this: Since May of 2005, 1,000 job seekers have left the area." Put your thinking cap on and tell me how that will affect the local market. The population has delcined about 5,000 since the year 2000.
I live on a 120-acre farm about 4 miles from town. I was sitting on the porch yesterday afternoon and was listening to the sounds of residential construction in a nearby subdivisions building spec houses. Why I have no idea but life goes on. Based on the ERC method we have a 1,000 year supply of inventory. The population is going down and new houses are being built. Hey, may 2,000 year supply. Who knows?

 

[Fred]

Checking the "over supply" box is like hitting the "declining" value box. The appraiser at checks it is required to "prove" or write addnedum adnausuam.
I've recently switched from "shortage" box to the "in balance" box.....because listings in the last six months have increased by 50% and are back where they were 3 years ago.

Appraising not figuring out what things are, were and will be worth. It’s checking the boxes that make the deals go through with the least angst.

There are 14 active-contingent (inspection period) average DOM of 63 and 24 pendings average DOM of 55. In the most simplistic terms there is at least an 11 month supply of existing houses, in addition to new construction competition. I'm leaning toward an oversupply,

I see two problems with this.

The first is that no one knows what a “normal” market is.
Is it “normal” to have 50 buyers and 100 listing or “normal” to have 100 buyers and 50 listings? It is possible to compare on period to another, but which one is "balance?" I'm from NYC where co-ops and so forth have had waiting lists that 10 years long for my whole life. By most people’s standards the market has been “out of balance” for 200 years. Absorption can sometimes be measured in minutes. The government mucks around with the market forces multiplying the distortions. People have killed over "rent control."

The second is that these conversions to “months’ supply’ is nuts.
One hundred listing in a market that has 10 sales per month is not 10 months supply. If they are offered at $1 million each that could be 100 year’s supply, but if they are offered at $10,000 each that could be one week’s supply.

 

[Verne Hebert]

Interesting.

So how should we look at balance, and oversupply and undersupply in the residential market? What is the acid test? Must some assumptions be a part of any balance analysis?

This is a significant concept in making buying decisions of SFR property..........and in looking at any trending analysis?

To answer the question. I wouldn't check oversupply---even based upon your analysis (ERC concept).

 

[Richard Carlsen]

Austin

Texts are instructive often not practical. When you have 8 sales in a price range in the market area during the past 12 months, (not the 1000 you speak of), with an average of 168 DOM and there are currently 14 listings in the same price range, one does not have to worry about new household creations to state that the market is in an over-supply condition.

 

[jay trotta]

don't know where the "oversupply" aspect comes into play in your area;

it appears that the Realtor was provoked buy the Seller who wanted to "Test" the market waters at $15k over market, they went over the 60 day mark which appears typical and then reduced it, creating the delayed contract issue.

Ben there, done that - it's an old marketing trick from way back (usually the Seller is smarter than the Realtor and overprices's the house because his house is, sooooooo special....ROFL), they usually wind up loosing money-this guy sounds like he just made it in time.

good luck

 

[Pat Butler]

Performing an absorption analysis the way that ERC instructs assumes that the recent history of absorption will continue at the same rate. However, nothing says that you can't adjust the forecasted absorption using this method based upon anticipated future factors such as job loss or increased supply of houses from new subdivisions. Some people do the absorption based upon last year's sales, while other use a shorter period of time.

I think the biggest problem with this method is that it assumes that houses will continue to sell on an even level, like 5 houses per month. Nonetheless, if you have enough data to develop reliable results then an 11 month supply seems way high enough in order to indicate a market that is oversupplied.