What is your definition of Oversupply?

[Lawrence R.]

Just wondering what is the threshold a market or sub-market must cross before you deem the market conditions as oversupplied?

 

[Lawrence R.]

Well, nvermind.

It seems I found a thread from January 07 that deals with most of you guys nicely.

If anyone would care to read their prior comments and reiterate or revise.... feel free to do so.

 

[Kevin Keck]

Declining values is the greatest indicator of market oversupply. Values decline when an oversupply exists. In my mind it is really just that simple. There is no magical number of months listing inventory that answers this question. A market could only have two listings but if there are no buyers an oversupply exists. Another market, similar in housing density, could have 30 listings and be balanced provided there are enough potential buyers.

 

[Don Clark]

Just wondering what is the threshold a market or sub-market must cross before you deem the market conditions as oversupplied?

Larry,

Just my opinion but it would be more supply than demand could absorb in a reasonable time. I would look first at the average marketing time. Then i would look at the number of closed sales in the past year, quarter, or whatever you choose as the time frame to be studied. If there were 12 closed sales in the past 12 months, then 1 sale per month would be the likely absorbtion rate. Now, if there are 24 active listings, then, all things being equal, it would take 2 years to absorb the supply. That would be an over supply to me. However, i prefer, because of variables, to do an absorbtion study on a quarterly basis. Then, if the absorbtion rate showed 4 closed sales the first quarter, 2 the second quarter, 2 the third quarter, and 4 the fourth quarter, that would give me a better indication of what amount of inventory could be absorbed in each quarter.

 

[ZZGAMAZZ]

In my newbee opinion, terms like oversupply, undersupply, and equilibrium are relative; and there has not been a stable period in most markets for the past 7 years, so the issue is moot, and all answers right/wrong.

Somebody (I think it was PropEcon) suggested that we use the rows & columns near the top of page 1 of the 1004 to define values/supply-demand/market. Seems like it would be well neigh impossible to criticize that rationale in the absence of anything more definitive.

 

[Don Clark]

In my newbee opinion, terms like oversupply, undersupply, and equilibrium are relative; and there has not been a stable period in most markets for the past 7 years, so the issue is moot, and all answers right/wrong.

Somebody (I think it was PropEcon) suggested that we use the rows & columns near the top of page 1 of the 1004 to define values/supply-demand/market. Seems like it would be well neigh impossible to criticize that rationale in the absence of anything more definitive.

And you are an expert on markets, right? BTW, are you referring to the nationwide market, the west coast market, the east coast market, or exactly what market are you referring to?

You do not have a clue to what is going on in my market, or any sub-market of the greater market where i do business. Even your answer quoting someone else leads me to beluieve that you do not understand how markets function. You talk about supply, demand, and market and understand not one of those concepts if you do not understand how all the factors in a market act and react, and how you can glean from that whether or not a market is increasing, stable or in decline.

 

[moh malekpour]

Supply always is measured by demand. Less demand causes over supply. Measuring the past demand doesn't necessarily indicate the future demand unless you study and analyze the cause of demand.
In the past few years, there was more demand for homes than now for many reasons but mostly were:
1-low interst rates. today, they are higher
2-easy financing,.today, it is harder to get a loan
3-existance of sub prime loans. today, they are not there anymore
4-employment level. today, some jobs related to real estate or mortgage are not there.
5-Market sentiment. today, most people are cautious to buy a home because they might be able to buy the same home cheaper next month.
6-supply sources such as regular homesellers and developers. today, regular homesellers, developers, REOs and short sellers.
7-speculators, flippers and investors in the market. today, there are less of them in the market

 

[Mztk1]

I like Kevin's answer, it is easy to understand and apply, but I don't agree with it. In the past month or two in many of my locations there has been a reduction in supply where now absorptions rates (the way Don measures them) have dropped below 3 to 6 months, but only because the owners dropped their prices dramatically in order to coincide selling with school closing. The result is a newly developed balance in supply and demand (perhaps even an undersupply because at the right price people came out in droves) with sharply declining values.

I think GAMA is right to a point. I don't think there is a "Right/Wrong" answer in that I don't believe any one answer can be used as a blanket for all markets. But I do think if you analyze a market closely you will find there is a way to determine whether there is an oversupply in that market. Days on market in excess of 6 months, with supply over 6 months for listings priced in line or lower than the average closed sale from the last 6 months, and the bulk of listings have been on the market for 3 months or longer would, may I be so bold as to say "In anyone's opinion", be an oversupply. But a 12 month supply where the median asking price is 30% above the median sale price for a conforming neighborhood and there is only a 3 month supply of houses that are priced in line with the closed sales, would likely not constitute an oversupply, especially where marketing times are on average less than 6 months for the closed sales and the list price to sale price ratio is in the 95+ range. (I see that a lot too.)

 

[Couch Potato]

I like Kevin's answer, it is easy to understand and apply, but I don't agree with it. In the past month or two in many of my locations there has been a reduction in supply where now absorptions rates (the way Don measures them) have dropped below 3 to 6 months, but only because the owners dropped their prices dramatically in order to coincide selling with school closing. The result is a newly developed balance in supply and demand (perhaps even an undersupply because at the right price people came out in droves) with sharply declining values.

This is the whole reason for making a judgement on supply. Prices can go up or down for a variety of reasons. Oversupply is one of the reasons prices may go down, just as a shortage can cause prices to go up. Sometimes lowering prices is not enough to create demand. If there are only 990 families in an area, that 991st house is not likely to sell at any price until another family arrives. (I know that is overly simplistic, but it makes a real point.) Oversupply does not have a simple formula that can be applied. It comes down to an appraiser's judgement on the number of houses available for purchase. Some of the best stats to support an oversupply opinion are drops in new construction, rise in expired listings and sale price is a lower percentage of asking price than other periods of time.

As professionals we need to know our markets, form opinions that are supported and put them in our reports. If the only market research one is doing is to find comparable sales for a given assignment, one is not in a position to form an opinion on supply.

 

[Vernon Martin]

Many realtors consider an inventory of three to six months worth of unsold homes to be a balanced market. Greater than six months' worth of inventory may be the start of oversupply conditions, and although the prices don't drop immediately, they eventually do unless an extraordinary event happens, such as when Katrina refugees filled every vacant space in Baton Rouge in a matter of weeks.

It seems that residential appraisers understand this a lot better than commercial appraisers do, but commercial appraisers (like me) are the ones that get hired to appraise subdivisions and condo projects. This mismatching of appraisers is already creating an impending disaster for the major subdivision lenders.