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.

A New Problem

I've written before about how many sales are now for cash.  It's ironic, because mortgage rates are still really  low; however, it's hard enough for most people to get a mortgage, both because of credit issues and because of the paperwork requirements and timing, that many are choosing to go the cash route.  Some of those people may go back and refinance later, but they are showing up at the closing table with cash.  56% of our sales in the first four months of the year were for cash!  And that's true around the country, although in some places,  it's due to multiple bids on insufficient inventory, leading to cash offers as a tactic to secure the property by nervous buyers.

 We never thought we'd say this, but the change in closing dates has brought challenges that we couldn't imagine.  One of those is that personal checks, given by buyers as deposits on sales, don't always have time to clear our escrow accounts before the closings.  The big rush to close has been exacerbated, both for weather reasons (a slow start to the selling season and the need to close during the summer), and because many more people are choosing to cut out contingencies as a bargaining chip, so they have fewer things to do before they close.  Also, there are lots of investors, who are buying at what they perceive to be bargain prices, and who may be planning to renovate anyway.

That's what we love about real estate--there's a new set of challenges in every kind of market!

Third Quarter Statistics

Our office has just posted statistics for the third quarter of 2012, which we get from the Connecticut Multiple  Listing Service, and it shows that activity is definitely improving.  Sales are up almost 18% from last year, and there is increased movement in almost every town.

The median sales price was down by nearly 2%, which should caution sellers not to be greedy.  Connecticut is ranked 46th in terms of price recovery from the depths of the recession.  In addition, there are so many homes on the market that the absorption rate stretches out for a couple of years.  For example, Guilford and Madison each have about 400 homes on the market, and each has seen about 175 sell this year so far.  That means that it would take almost two years at the current rate until all properties are sold.

Now, that's more pessimistic than it ought to be.  As with all markets, there are properties on the MLS that are overpriced or in poor condition or in bad locations, and many of those will expire without selling.  That means that good properties, well priced, should move fairly quickly, at least in comparison to the past few years.  It won't happen as quickly in the higher price ranges, because it's harder to price and market homes over a million, and there have only been about five more that have sold this year (64 in all).

In all categories, though, days on market (DOM) have declined, and market speed has increased.  For a complete report, go to www.hpearce.com.

Market Inventory

We recently received a market inventory study from Madison, Wisconsin, showing that higher-end properties were not selling and lower ones were. Not a big surprise, but we decided to look at our market. What we found was similar, and striking.

Properties over $700,000 are less than 3% of sales now, there are enough homes in that range on the market to represent more than a year's supply, and the sales have fallen almost in half from last year. At the lower end, under $300,000, there exists only a supply of two and a half months, sales have risen by a third, and they represent 41% of all sales. While we knew that first-time homebuyers were driving the current market, it's still fascinating to see that laid out in statistics.

Overall, in our region, prices have fallen 15% since the same time last year. If you put all these facts together, what it tells you is that you are more likely to sell your home quickly if it's in a lower price range and you price it aggressively. But you knew that already!