By now it’s widely recognized that our real estate markets has changed. One popular indicator of general market conditions is the median sales price. At this point the median price not only does not tell a very clear picture, but also completely misses the story of what is happening in the market place.
Absorption – What’s That?
In real estate circles absorption is a term that describes how quickly the market will absorb (sell existing inventory) properties now for sale. In other words, if there were 15 properties for sale and they were selling at the rate of 5 per month, the absorption period within with all might sell would be 3 month.
A review of recent market data shows the following information for inventory, sales and absorption for the last years months, compared to the same months one year ago.
What Conclusions Can We Draw?
The supply of homes for sale has increased at the same time as demand has declined. The result on the absorption rate is a dramatic increase. If prices stay the same, the time it will take for homes to sell will increase. Since it’s price movements that traditionally bring supply and demand into equilibrium, it’s likely that it will take reduced prices to trigger an increase in demand and move the inventory more rapidly. As priced decline further some sellers may withdraw from the market, thereby reducing inventory and also helping the reach equilibrium.
Explaining Median Prices
Surprisingly the median home price, after some erratic gyrations over the last 12 months stands almost at the same level of the peak achieved in August 2005. This would seem to contradict what everyone is experiencing in the marketplace, which is softness in home prices. The only logical explanation is that the mix of homes sold has changed to include more higher priced homes than lower priced ones, thereby causing the median price to stay higher than the everyday observation would expect.
Jack Atkin, Broker