Tuesday, June 16, 2009

Flat is the New Up

Information is power. I don’t care if the information is good or bad – I just like knowing what is going on because left to my own paranoia and imagination (even though I am an eternal optimist) I will often unnecessarily assume the worst.

Actually, whenever given a choice I like hearing the bad news first. (The good news will take care of itself but I want to start solving the problems as soon as possible.)

I want data, stats, facts and figures. Not necessarily the minutiae, just the indicators that help place any situation in perspective with history. I like trends and I like the ability to make future decisions based on the knowledge stored within my own mental database.

And I like the 15th of each month. Not because this is the day that employment tax payments are due – but because I get an email from David Flory, a mortgage consultant with Cunningham & Company.

He provides an excellent synopsis of the local MLS report, in plain language, combined with comparisons of both previous months and previous years. He can also tie this information to the mortgage rates which have an effect on motivating people who plan to buy a home but just aren’t sure when to do it (seeing historically low rates rise when you are making a potential 30 year commitment can help you make a decision quickly).

His report tracks all kinds of good stuff. Listing Inventory, Average Sold Price, Sold Units, Median Sold Price, Market Absorption Rate, List to Sold Price Ratio, Seller Concessions and Days on Market.

I won’t bootleg his whole report – I am certain that if you email Mr. Flory he will gladly add you to his regular email list – but I wanted to convey a one very specific area that I enjoy watching:

Absorption. This is my favorite because I started tracking it in late 2002 and it is what gave me the confidence to begin buying a lot of beach property in 2003, especially our beloved and missed (but very profitable) home in Ocean Isle that we sold in 2006.

Market absorption is the number of homes sold in a month divided by the current listing inventory. Most professionals agree that a “6 month absorption” is the tipping point between a “sellers market” (any number less than 6 months) vs. a “buyers market” (a number greater than 6 months).

It also helps to determine an asking price in order to gain a quick sale by seeing what comparable listings are moving (and what are not) – especially when prices are viewed over a 3 to 6 month window. (but that is a separate formula more specific to those preferring to sell too soon rather than too late)

Based on the May 2009 MLS report, there were 5,489 homes for sale in the region. We had 362 sales (closings). This gives us a 15 month supply of homes. Sounds like a lot of months (and it is) but not necessarily when looking at the big picture.

From April ’09 to May ’09 (one month) this number dropped by 2.5 months. That’s important especially given the time of year.

You also must look at the average over several months. November ’08 and January ’09 were miserable months for real estate so it should be no surprise that those numbers were 25.7 and 28.9 months respectively. Very few homes were sold in those months even though inventory was relatively unchanged.

But if you look at Sept ’08 with 15.7 months and Oct ’08 with 16.4 months and then compare it with March ’09 at 16.7 months and April ’09 with 17.7 we are seeing a relatively level trend.

A Springtime spike is expected because that is when inventory increases as people begin putting their homes on the market in hopes of selling during the Summer. That spike should have been 3 or 4 months in my opinion but was only about 1.

In areas like Wilmington where you have a very strong second home market, this number is easily skewed and can move quickly because a few things can happen all at once that bring this number down.

For instance, we are seeing people who were completely priced out of the second home market along the beaches now finding affordability. Specific to Carolina and Kure Beaches where we have a lot of inventory (576 homes) we saw the absorption rate dip 5.2 months just between April and May! Still a lot of homes to sell but nevertheless impressive.

Another thing that usually occurs in Spring is new, speculative home construction starts. Even though the homes may be 6 months from being completed, they typically go on the market in the Spring. However, because of the overall real estate market and the lack of financing available for spec projects, we saw no permits for this type of real estate. This will further help to erode away our inventory and draw us ever closer to a lower monthly absorption number (especially as the Fall approaches)

This is encouraging to me because it is far from our balanced market of a 6 months absorption rate but it shows a level trend that when coupled with other influencing factors will push this number down which means our local real estate economy will trend upward.

Hence ‘flat is the new up’!

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