Why Do Absorption Rates Matter?

Recently, we started publishing absorption rates, as a way to judge the health of the Connecticut housing market.  We knew instinctively that things were not as robust here as they are in other states and regions.  It's hard to tell, however, by using average sales prices, which reflect so many other variables, or even average units sold.  That number is influenced by weather, timing, mortgages, and demographics.

While absorption rates take those factors into account as well, they level the playing field in a way.  So, if the Southwest has twice the supply, but also twice the number of buyers, the absorption rate will be more or less the same.  Absorption rate is simply the number of months it would take to sell every house on the market, at the current rate of sales.  Therefore, if it seems that there are a lot of houses on the market that aren't selling because they are stale, overpriced, or undesirable in some way, that shouldn't matter, because every region has those same types of houses.  The only way that the absorption rate would change compared to another area is if, for some reason, many more of them existed in one market vs. another.  While that could happen, it is usually pretty constant.  Sales that fall through due to contingencies, especially mortgages, also would be fairly constant by location.

That all means that, when Connecticut has twice the absorption rate of the national number (8 months' supply vs. 4 nationally), it means that our recovery is lagging.  Although we knew that, this statistic gives us a good proxy for the strength of the housing market in general.  So San Francisco, with 15 days of supply, is obviously a hot market.

Our market, while not in that category, is also improving.  You can see from my recent blog post that our absorption rate here is dropping.  We don't actually want it to approach San Francisco's rate, since that's a market too hot for most buyers to handle.  The most important fact to note is that we are trending down, so our market is improving.  When we get to a reasonable level of four months or so, we'd be happy to stay there for the foreseeable future, because that would be a balanced level of supply and demand.  And, at current trend rates, we're not far away.

Recovery Doesn't Have To Be Perfect

While people seem to feel lately that we have avoided a "double dip" problem, there are various conflicting statistics and opinions about the actual health of the economy.  From our point of view, we can see that the real estate sales units and average prices in our region haven't gone up very much in some cases, and that prices have gone down in many areas. 

This doesn't necessarily mean that the price of a house is still declining.  Very few of the sales are repeat sales of the exact same house, so it's very hard to tell what is happening on a micro level.  Since the current market includes so many first-time homebuyers, the average and median prices are bound to be lower, as they are skewed to the lower end.  Also, there have been so few high-end sales in some towns that it's hard to have a meaningful average. 

What is true is what we're hearing.  We aren't hearing as many people say that they are waiting to see whether prices go down further.  We aren't hearing as many people say that they are renting because they can't sell the home they left behind when they relocated.  We aren't hearing as many people talking about another major decline.

While it is true that buyers still expect good "deals", often on homes that have already been priced to sell quickly, and while it is true that they want every detail of the home to be perfect, the conversation has shifted slightly.  The supply of houses on the market is declining around the country, and is notable in certain price ranges, at least for new listings.

The characterization I would use to describe the shift in mood and outlook is that we have switched from a "glass half empty" mode to a "glass half full" one.  That means that, while prices haven't risen, and while the market is a long way from roaring hot, people seem more balanced about the future of the economy, and their own futures.  Not exactly sanguine, but calmer.  Maybe it's the "new normal", or maybe it reflects a generation that barely remembers a skyrocketing real estate climate.  No matter the cause, we're glad to see it, and we're glad to be in a more positive selling environment at last.