Question about oversupply

[Austin]

Sales and Absorption are not the same

This is apparently confusing to some. Number of sales has nothing to do with absorption. If you have a static population then absorption is not possible. It is a game of musical chair. If the frictional vacancy is around 5% with a few new homes and a few demolitions the market will never be over supplied unless the population drops and the frictional vacancy factor goes to a higher number.
Every text book on market analysis is predicated on population growth. I have taken the AI market analysis class two times. The first time was in the early 90's. I listened to Dr. Rabanski for a few days and all to talked about was population growth and absorption. I told him that I lived in an area with a declining population and asked how to measure absorption in such a market. He scratched his head and said: "Damn! I don't know. I never thought of that."
Days on the market has nothing to do with an over supply either. That is a slow market. Totally different concept.
In summary: Dividing the number of sales into the available inventory is not an estimate of absorption nor does it give you any indication how long it take to sell the subject property. Absorption is relevant with population growth. Absorption relates to new demand in relation to given supply. An over supply means there is more supply than demand. When supply out paces absorption, then an over supply is created. A slow market has nothing to do with over supply. You can have an over supply and an active market. Over supply creates a buyers market. A buyers market typically has long marketing times because the longer the buyers wait the lower the prices go. Under supply creates a sellers market with rising prices. Typically short markting times because people buy before the prices go up. I am not sure days on the market means much. There are a lot of things it could indicate.

 

[Fred]

Verne,

So how should we look at balance, and oversupply and undersupply in the residential market? What is the acid test?

That’s something that has to be defined for the individual assignment.

I don’t know the source of the idea to define the balance of supply and demand as the ratio of sales to new listings. That isn’t what those terms normally mean. It leads to some confusing report. The original post said subject sold in five days, and that just the MLS accounts for more than one sale every three days. Would you want to use terms that indicate a “bad market” when something can sell in five days (and prices are not falling)?

Another consideration is the date of appraisal. ERC appraisal says what the property will be worth. Normal mortgage appraisal says what the property would have sold for on inspection date (if it was already for sale, like for 3-6 months). I don’t’ think I would be looking at the same listings.

 

[Pat Butler]

If you have a static population then absorption is not possible.

I think you are getting commercial and residential absorption mixed up. I'll grant you that the way in which the ERC recommends isn't a 'typical' type of absorption analysis, but everyone in the relo business knows what they mean. They would probably be better served by using a term like 'turnover', or at least something other than absorption. Regardless of the term, the analysis of the rate at which listed houses get sold is very useful.

Even if the population growth is static, you can still have sales. Even if you have a declining population, there can still be house sales. And how fast the subject might sell depends on how quickly the turn over of houses is happending.

Who cares if it's just musical chairs? If you are a seller, you couldn't care less if your buyer just came from across town. If they buy your house then the net population gain in that market is zero- I agree with you. And if that's all that is happening in a particular market then the rate at which a house is likely to sell can still be calculated.

I think Dr. Rabanski needs to get a real estate license and try to sell some houses. He'll find out like the rest of us that houses can still sell at a particular rate in a static or declining market. And the rate at which those houses sell can tell us something about how long the subject is likely to be on the market.

I don’t know the source of the idea to define the balance of supply and demand as the ratio of sales to new listings

The ERC Relocation Training Guide was developed by the many of the top appraisers in the relocation industry at that time. It has served to be a useful analysis for those who use it.

.

 

[Fred]

Dividing the number of sales into the available inventory is not an estimate of absorption

That's true. And since we may be talking about occupied space, it is already been absorbed.

 

[Ultraviolet]

Great discussion, everyone. Thanks for the info; it's what I was looking for. I don't think I introduced the term "absorption rate" into the discussion, but was merely reporting statistics that might provide additional information. Yes, one of my Big Bank clients wants what THEY call an "absorption rate" which is the lite version of what has been discussed here. I was merely using that technique as a shortcut to provide information, though obviously in an erroneous way, which was pointed out.

Incidentally, after reading the responses here and looking more closely at actual DOM (based on when the prices were lowered to the realm of reality) there is no real over supply, just a bunch of greedy sellers and Realtors who are too afraid to lose listings by challenging the sellers' expectations.

After wasting all that time trying to sell the property at an inflated price and then accepting an offer after 5 days of putting a real price on it, the seller lost about $5,000. Yep - my value was $5,000 above the contract price and was solidly supported with three sales closed in the last 30 days and a pending sale two doors from the subject.

It's definitely a buyer's market in this community. Four listings within a block of the subject, all at prices ranging from 5-10% above the most recent sales. There are definitely buyers, but they're becoming more savvy and are willing to wait out the sellers' greed.

The parties in the new assignment I'm working on in a different community won't be so lucky, unfortunately. US Home/Lennar and Richmond American area having fire sales on spec houses and selling them at up to 20% below list price after discounts and incentives (average 140 DOM - new construction but DOM is calculated up to contract date). They have 6,000 more vacant lots to fill and community facilities that are still advertised as "coming soon" after 12 months. They've sold 1,000 homes (with active resales) so far. Would that be considered an over supply?

 

[jay trotta]

with interest rates looking towards another increase, soon, how does that affect market shares in your area ?

if it knocks out 5-15% of the market out, that "could have" purchased prior to the increase, how will that affect your area ? Market Time & how would it increase the number of dwellings continuing to stay On The Market ?
Add to this the other aspect of "Job Loss" and you will have created somewhat of an oversupply or will you ?

there is so much to consider when you are doing "projected value opinions", that you could be significantly Wrong - and get a Badd grade on your ERC work. Ifn we were all that intuative, we could make tons of money on wall street and there wouldn't be an appraiser found for miles, ceptin "Skippy"..lol

 

[Austin]

Comments on above posts

The statements above can be taken to fill in the gaps of misunderstanding. In my view, the question of days on the market is answered and explained in the market analysis section of the report with a level A or B analysis. In this analysis these question are answered: Who is the most likely buyer, when, and under what terms." Remember USPAP requires a market analysis. For example. If the number of listing increases by 50% from one quarter to the next, that may be an over supply of listings which indicates a slowing market but not an overall market over supply. Frictional vacancy is the reference point for market over supply. These questions all relate to the market analysis. For example, number of sales tells you nothing about how fast the subject will sell, however analyzing comparable sales at confirmed sale prices in relation to marketing time may be a good indication. These are questions of market analysis.

Pat says everybody in the Relo business know what the ERC form means. Why doesn't the form say what it means. The analysis of how many houses sales tells you nothing without an analysis of the prices and answering these questions in the market analysis. Who, when, what terms.

 

[The Bob]

Rae,

I think part of what you are seeing is what economists call "price stickiness". Basically it is resistance to change in a market.

http://www.google.com/search?hl=en&lr=&q=price+stickiness&btnG=Search