While predicting the future is a perilous occupation, market dynamics (as it relates to real estate prices) are in fact predictable. So although our crystal ball is in the shop when it comes to predicting the winner of the Colts and Patriots game, we CAN draw informed, data driven, conclusions about the market’s direction as it relates to values within a particular community.
Price trends in real estate are largely a reflection of supply and demand dynamics at work.
As we recall from Econ 101, we’re talking about “the relationship between the quantity of a commodity available for sale and the quantity that consumers are willing and able to buy. The function of the market is to equalize demand and supply through price. If buyers want to purchase more of a commodity than is available in the market, they will tend to bid the price up. If more of a commodity is available than buyers care to purchase, suppliers will bid the prices down. There is a tendency toward an equilibrium price at which the quantity demanded equals the quantity supplied.”
In real estate we use a tool called “Absorption Rate” to analyze the health or direction of a market (as it relates to prices). Simply put, it is the mathematical representation of the relationship between supply and demand. When employed, the formula produces the number of months it would take (at the current sales pace) to sell the entire inventory of product. From this, we can then draw conclusions about the near term fate of real estate values.
Balanced markets have approximately 6 months of supply. & Prices hold steady.
Seller’s markets have b/w 1 and 5 months of supply. & Prices increase.
Buyer’s markets have 7 months or more of supply. & Prices decrease.
History has shown Absorption Rate Analysis to be a tried and true mechanism for predicting the future trend of values for local markets. It’s so reliable that in 2009 the FHA released new guidelines for appraisals in declining markets. Their “Market Conditions Addendum” (effective April 1, 2009) mandated an Absorption Rate Analysis “which is critical to developing and supporting market trend conclusions.”
In summary, if prices are still sliding in your market – supply is still outpacing demand. And when supply outpaces demand, sellers bid the prices down while they compete for the handful of active buyers in their market.
Fortunately, we’re seeing an uptick in unit sales throughout the Lowcountry! The process of absorbing existing inventory is underway and with time this will translate to a balanced equilibrium of supply and demand. If you’re curious to know how long that process will take for your community, contact us and we’ll run the numbers for your review and analysis.