I wrote about it yesterday as I put the pieces of the puzzle together and saw the pattern develop. Today while finishing a report for a corporate client I had to calculate an absorption rate a specific price point in a popular zip code in a geographically desirable area of North Wilmington (DE). What I found really drove the point I made yesterday home.
Real estate markets vary greatly within the United States. I just want to be absolutely clear that what I am seeing in my market has no impact on what you may be seeing in Buffalo, New York. Our market has been somewhat insulated from the bubble prior to this time period because of a lot of relocation in and out, corporations are always adjusting and moving in a changing economy. Additionally in NO way am I saying now is not a good time to buy real estate. Now is a WONDERFUL time to buy real estate IF you are buying for the right reasons.
Now, how about a definition of what a real estate absorption rate is, per Answers.com this is the definition:
“The number shows the rate at which the inventory of homes for sale are being sold. A declining figure indicates people the inventory is decreasing as more homes are being sold than are coming onto the market. A rising absorption rate implies that there are more homes coming onto the market than there are buyers willing to buy at the market prices.”
Before I proceed further let me give you a little more information on market definitions. To define a “Buyer’s Market” vs a “Seller’s Market” depends on the resulting absorption rate numbers. Essentially any absorption rate under 6 months is typically a Seller’s market, meaning the supply of homes does not meet the demand of the buyers. Over 6 months is indicative of a Buyer’s Market.
For everything I will now reference I am using the strongest market segment in my particular market. The most active price in the last quarter was just about $299,000. The calculations I did today were on a price range of $275,000-325,000 in the 19803 zip code.
In Northern New Castle County Delaware in the first 6 months of 2010 I was seeing rates that were typically between 1-4 months depending on price point and market. In April I calculated the absorption rate in a comparable area at 3.7 months. Today my calculate was truly frightening, 18 months. If a Buyers market is anything over 6 months and I am staring at an 18 month absorption rate how do I ask a real estate professional, in my market, interpret that?
Buyers are on the fence. Interest rates are incredibly low, prices are very good (our market is sitting with prices similar to between 1999-2005 depending on the location) and everything out there says “Buy!” So why are the buyers today on the fence? They are hesitating to buy because they don’t want to see the market slide lower. The irony of this is that they are creating that exact situation by not purchasing. They really are only hurting themselves in the long run.
A real estate purchase is not a quick nor short term investment. If you will regret what the price may be in three months or a year, then you need to rethink whether you are really ready to be a homeowner. Homeownership is an investment and like any investment there is always a risk. If you are planning to stay in your home for five or more years then stop being so myopic and purchase.
If you aren’t sure if you want to take off to Timbuktu next year then rent. It really isn’t a tough decision. Buyers need to be brutally honest with themselves at this time and make an informed decision and not being swayed by the perception of “status quo”. There is nothing wrong with renting, IF you can find a rental. Certain markets have extreme rental shortages due to the high foreclosure rate. Depending on where you live you may want to talk to a financial advisor and look at the actual cost of ownership versus renting.
If the current Buyer pool does not make a commitment to begin buying in the next few weeks here is what we will see with the blame placed squarely on their shoulders (again, MY opinion). The real estate market will begin a second drop, we are the front line so after the wave hits us it will proceed on through the economy. House purchases stop and most other spending stops too. We will see another economic downturn and it will be bigger than the last.
The only way to prevent this is for the buyers to see the extreme values in the housing market, recognize their own motivation and move forward with a purchase. The time is right to buy and even better to move up. I have said it before and will say it again and feel free to read my previous opinions on buying and selling. My house is still worth 70% more than when I purchased it in 1999.
What’s your opinion?