Where is our real estate market headed? Will we have a “double dip” recession? If home prices keep going down, is it smart to buy or try to sell? These are some of the many questions I field every day from nervous homebuyers and sellers. I believe we are moving slowly through a recovery phase. If you want to predict where the real estate market is headed and how long it will take for it to recover fully, it is important to understand the concept of absorption.
Absorption is the number of months it will take for an inventory of properties to be sold. A declining absorption rate means inventory is shrinking, while a rising absorption rate indicates inventory is growing. When determining absorption rate, you take the number of homes that sold each month last year, and divide that into the total numbers of homes on the market. As an example, if 96 homes sold in a market area last year, then you have an average of 8 sales per month (96 ÷12). If there are currently 120 homes for sale in that same market area, you have 15 months of inventory (120 ÷ 8), and the absorption rate would be expressed as 15. In other words, it will take 15 months to sell all homes that are on the market.
Currently, the greater Denver area has an absorption rate of 7 or approximately a 7-month supply of homes. Nationally, we have approximately a 10-month supply of homes. The absorption rate does appear to be shrinking, perhaps indicating a recovering market. Nationally, according to Lawrence Yun, Chief Economist of the National Association of Realtors®, “the housing market is in the early stages of recovery.” He also predicted the recovery would remain “choppy” while the foreclosures work their way through the system. I agree that we must wait to see what happens with the emerging foreclosure challenges. The longer the foreclosures continue to plague and flood our market, the longer the recovery will take.
The very good news is that existing homes sales rose again in September. Frankly, this is the basis of Mr. Yun’s declaration. Another part of the story is that we had the worst summer in the housing market in many years. Nonetheless, the trend is up and we are all very happy to see it. Market trends are important indicators to be considered when making buying decisions. However, they are not the only factors to consider. I have long believed that buying a home for your family should not be approached purely as an investment decision. Your home is where you live your life and gather with your friends and family. It can also be an asset. It is smart to be clear about what you are attempting to achieve and your objectives.
Long-term market stability is another indicator that should also be considered. Let’s consider some of the market influences that affect the stability of the real estate market. In my opinion, the number one influencer is jobs and the perception of job security. The second largest factor is housing starts (the number of new homes being built), and the third largest is factor is the number of foreclosures. The simple fact is that, when unemployment is low and consumer confidence high, people buy homes. The reverse is also true. Just a few years ago, housing starts were about two million annually. The problem was that we were growing by only about a million buyers at the same time. Homes flooded the market at a time when the economy was in trouble and the major lenders, who had started to face mounting foreclosures, dramatically tightened access to loans. Some have described this as a perfect storm.
It is tough to predict the return of the economy and, thus, the return of the real estate market. In fact, if you take the time to research the issues, you will find opinions all over the board. Warren Buffet predicts a return of the real estate market in about a year. While others predict doom and gloom that our grandchildren will be facing long after we’re gone. Another complicating factor is the risk of another major attack on our soil. 9/11 still affects us and another attack could slow down our recovery.
Nonetheless, I am an eternal optimist and believe we will see a return to a strong market. However, I do not have a crystal ball, and some of the factors affecting the market, as described above, are still unknown. Perhaps the largest unknown is the so-called “Foreclosure-gate”, where some banks have been accused of foreclosing on properties without proper documentation. Foreclosure-gate will have a dramatic effect on the recovery time.
From my research, at the current rate of growth and improvement, many economists predict the recovery will be in full swing by 2013. The cautionary note is that Foreclosure-gate could slow it down and take us until 2014.
With interest rates at historic lows and the price of homes held down, it seems like this is a great time to checkout your ability to take advantage of the market. As Christian Durland said in his blog on this site, we believe that real estate will continue to be a phenomenal investment – when made wisely.