Real estate slump is coming to an end
When it comes to the real estate market there’s dozens of opinions. I like to see charts and analyze numbers, so I will explain my point of view of the real estate market using my own analysis. Like any analysis in the world, it might be correct and there’s a chance that it is wrong - And you can consider that as a disclaimer.
Every month GCAAR releases a monthly statistics that shows how many new listings came on the MLS, and how many contracts did we have, and how many settlements we had by the end of that month. Those numbers are from the MRIS MLS. One of the categories they present is Montgomery County single family homes, which includes both townhouses and detached units.
I ran a monthly analysis starting from January 2003. For each month I calculated the absorption rate, defined as Settlements/New listings. This is not accurate but close to the real absorption rate and the reason is that settlements during that month happened due to listings in the past months. I took that as an indicator of the probability that a listing sells.
For every month, I calculated the relative absorption defined as the ratio between this months absorption, and the absorption of the same month a year ago. In essence, if this number is greater than one it means that the possibility that a listing sells at that month is higher than the previous the same month a year ago. If less than one, it means that the possibility to sell a listing is less i.e. the market is slowing down. The lower the number, the faster the market is falling. The lowest point in this curve would define the slump i.e. the time in which we saw the steepest fall.
Remember, this curve starts at Feb 2003, ends April 2007. A month is missing at the start and the end because there’s a three months moving average with a sliding window centered at each month.
Any one would notice that according to the method I used, the steepest fall was on Feb 2006. That does not mean that Feb 2006 had the lowest sales prices, because the curve continued to be less than one after i.e. absorption continued to drop, as well as prices due to large inventory. However, on March 2007 the curve passed 1 up, and down again in April. If the curve continues to hop up and down close to one, this means that the market is stabilizing as absorption rates are neither falling down nor going up. In my opinion one of the reasons that led to that curve going closer to one is the fall in new home sales from builders.
The absorption rate in April 2007 was 36%, and in my opinion the number we need to see for the market to turn back into appreciation is 80% !
Since the chart does not show the future then we just have to keep analyzing :).
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January 23rd, 2008 at 10:22 pm
[...] is an updated chart to the posts I had made earlier. At that time I was hoping that the curve pointing up is pointing to a recovering real estate [...]