After talking to people about my last post on Absorption Rates and the lack of a correlation between slower absorption and lower median prices (or faster absorption and higher prices), I got the impression that there was some curiosity — skepticism? — about the underlying numbers. So I thought a post mortem of sorts was in order. Here’s a chart that simply tracks total listings and total sales over a little more than the two years covered by the Absorption Rate chart.
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Revised Absorption Chart, but the results are the same, only worse
Thanks, Jean-Claude for making me take a second look at my methodology on my Absorption Chart. I had anticipated your point about the lag between listing dates and sales but had unfortunately gotten the formula backwards in my chart — basically dividing inventory by lagging sales, rather than forward sales: moral of the story: don’t do this stuff at 1 in the morning.) So I redid the chart with the correct formula inserted. (Excel groupies its =4*(AVERAGE(listings month 1, 2, 3)/AVERAGE(sales months 2, 3, and 4)). The data points at the end of the chart are averaged over shorter periods due to the lack of forward data. ...
Supply/Demand: Does it predict price? Maybe not.
Now hold on there, matie! Basic economic theory says more supply than demand, prices will fall, right? Well take a look at this graph. It shows the absorption rate of single family home listings from January 2006 through December 2008 plotted against median prices (click to make it bigger):
“Absorption” is basically the number of weeks it would take to sell all the homes available on the market based on the number of homes that are selling at that time. (I’ve tweaked the formula to diminish the spikes caused by the huge seasonal dropoff in new listings each December/January.) There are many ways to calculate absorption, but the basic idea is simply to capture how quickly demand is eating supply. Less time to absorb the supply should reflect a “hotter” market where sellers can demand top dollar. A higher absorption rate, on the other hand, means that there’s relatively more listings on the market than demand for them. That would tend to suggest a buyer’s market and softer prices. ...
Happy New Year! — The Official Blog Launch
Happy New Year everyone! I’d intended to illustrate this post with suitable icons for every winter tradition from Christmas to Kwanzaa but decided against it when I couldn’t think of a suitable graphic for non-believers. And why should they (we) feel left out?
The image is of a sculpture by Rodin. I saw it in the Rodin Museum in Paris during the summer of 2008 and, like so many of his sculptures, it seemed to glow from the inside. For me, these hands express the tenderness and grace that we humans are capable of. My wish for the New Year is that there be more of both in this world. ...
The Credit Crunch from the Other Side of the Desk
I’ve written a piece as a guest-writer for The Front Steps, one of the better blogs on SF Real Estate.
After talking to loan officers and loan brokers for several weeks about the lending environment, here are the takeaways:
Maybe it’s time to buy that first house….
That’s what New York Times journalist Ron Lieber discusses in Saturday’s Business Section. You can find a copy of the article here. Of course, nobody really knows where the real estate market is headed but Lieber suggests that now could be a good time to buy. Here are a few of the takeaways:
- First-time home-buyers presumably have the down-payment sitting in the bank, so they can benefit from the drop in home values without having to worry about selling their own home in a depressed market to raise the downpayment.
- Mortgage interest rates are currently pretty low by historical standards and could go lower if the federal government decides to try to drive them lower. If you can lock in a low rate for 30 years, that seems pretty smart.
- The best deals may be in “new” housing, where developers are desperate to get out from under bloated inventories. Those inventories, however, are falling as construction of new projects has come to a halt. With winter being a traditionally slow time to move houses, now may be a particularly good time to buy.
Along these lines, a loan officer recently told me that he’d heard of a downtown high-rise condo that was listed for $1.1 million and was sold by the developer for $770,000 — just enough to pay off the loan amount attributable to the unit. ...
The View from Space — Part 3: Above California
The forecast for the California Housing Market
The View from Space — Part 2
More pearls from Ken Rosen and the other big brains who addressed UC Berkeley’s Annual Real Estate and Economics Symposium on Monday:
• What to Invest In Now: Rosen and several other commentators say that REITS (publicly traded companies that invest in investment-grade real estate) are cheap relative to their underlying assets. Some are trading at around 50% of the replacement value of the assets they hold and are paying a dividend of around 10%. The best sector of the real estate market right now is the apartment rental market. (Makes sense, since a lot less people can afford to buy homes.) So look for REITS that own big apartment complexes in decent market areas (see below). Do your homework: be sure that they have good management teams and don’t have too much short-term debt because refinancing anything is going to be tough for a while. Hedge your bets. (Easier said than done for us mortals down here on planet earth.) Rosen has parked his cash in short term Treasuries. Obviously he’s worried. We should probably be too. ...