Absorbtion Rate? Or Just Supply vs. Demand?

I started hearing about absorbtion rate a number of months ago and wondered how it was being associated with  real estate.  My broker explained it to me and I told him it sounded like what I've reviewed with sellers for years...before correct phrases like "absorbtion rate" were popular.  It is obvious, to make it simple, if you have 4,679 homes on the market...we have 4,679 homes, condos and manufactured homes for sale in Reno and Sparks, NV as of tonight (11/14/06)...and on an average you sell 496 per month it will take 9.4 months to sell all those homes if no new homes come on the market.

Now to start muddying up the water, we know we have 200 - 300 or more new listings come on the market each month and an average this last year of 258 single family residences expire off the market each month.  We went from about 700 - 800 single family residences on the market in the middle of 2005 to about 5,500 available in the middle of 2006.  During the same time the builders, who had no inventory avaialbe in 2005 amd were not  delivering finished homes for as much as 18 months out, have standing inventory and are offering great incentives now in 2006.  The California buyers have stopped coming over the hill and homes just are not selling as fast as they were in 2004 and 2005. 

Now I'm not really making fun of "absorption rate" but relating it back to "supply/demand" which is what real estate sales, car sales, TV sales, grain, oil and widgit sales are all subject to...too many....price goes down...too few and price soars!  Real Estate sales (and prices) soared from about 2002 to the middle of 2005.  I was sure in July of 2005 that the market was turning (anyway my market started feeling it).  Though asking prices were still climbing, I started seeing more expired listings come on the market and time on market started creeping up.  Sellers were still listing at very high prices because many agents either did not know what was happening or they just wanted listings and would take them at any price.  The real professionals started taking fewer but better priced listings.  It was....and still is....sometimes impossible to get a seller to list with you at the correct price.  I have expierienced a number of times, since the middle of 2005, where sellers just could/would not accept my analysis of the market and the value of their home (they preferred a new agents market valuation over  an old timers with 25 years).  They just would not believe that the antiquated term "location", "location", "location" had returned to real estate sales.  

I am sure many agents had a similar experience to this one:  You would go over a market analysis with a seller and show where their home was worth approximately $395,000 - $425,000.  Now the seller had added a room and had more square footage than his neighbor who sold a few months ago for $365,000 and he just knows prices have not gone down.  As a matter of fact he will not take less than $475,000.  He doesn't really have to sell and will just rent his house if he can't get $450,000 - $475,000.  I noticed he listed his house for $499,000 with the first company and then about $450,000 with the next company.  They reduced it down to $409,000 and then took it off the market.  It might sell now for about $350,000 if someone will pay that in the neighborhood.  Now it is in a very good neighborhood but you can get a much nicer home in a neighborhood of more expensive homes for about the same price (or less).  

Now I know this is not an unusual story for these times but wanted to share it with you.  I know I could have sold this home for the low $400,000 range at the end  of 2005 or early 2006.  The seller had bought the home in 2000 for about $179,000 and probably put quite a few $$$ into the remodel.  I would estimate that selling at $400,000 would have been a profit (less selling expenses) of about $125,000.

Anyway...this market has been quite a ride for all, sellers, buyers, agents and anyone involved with the real estate industry.  The market is sometimes manipulated by the news media printing:  "buyer's market", "buyer's market", "buyer's market"...help! the sky is falling...oops!  That was chicken little.  In truth 2006 has been difficult on sellers as well as buyers.  The last few months we have seen many buyers saying they want wait to see where the market is going.  Some waited until this fall and saved as much as 10% on a home they were considering buying in July or August.

I bought investment property that is not worth as much this year as I paid last year.  Does it bother me...no.  Do I wish I had not purchased it...not really.  Do I think it was a good investment...absolutely.  Do I think the value will come back and surpass what I paid...definitely.  Real estate is and has always been a good investment.  It is still a limited resource and over a 5 - 10 year period a strong investment.  We did not, until recent years, expect to see property increase 20% - 30% per year.  If you made tons of $$$ during that period...congratulations.  If you lost $$$ during that period...I'm sorry to hear that.  I do remember a few years ago when a lot of people lost lots of $$$ in the stock market.  It kept going down and you kept holding on...ouch!  But that was then and this is now...DOW over 12,000...who'd a thought?

 Anyway...this is fun blogging about my livelyhood.  I hope you enjoy.    Dave Wiggins