Are We Approaching Another Real Estate Bubble?

By
Real Estate Agent with Atlanta Communities Real Estate Brokerage GREC #208281

I have found a stat that seems to be able to tell you which way prices are likely to go in the next 6-12 months.  

In real estate there's a term called absorption rate.  Sometimes people refer to it as the number of months of inventory.  One takes the number of current listings and divides it by the average number of monthly sales.  Depending on how many months back you go to get the average monthly sales, you'll get different results.

But a static number doesn't really give you much information.  You really need to see how that number has changed over the years relative to prices.  You need to see which way that number is trending.

I've come up with my own absorption rate and have plotted it out against average sales price going back to 2002.

I take the supply(number of current listings) and divide that by the demand(number of sales in the past month) to get my inventory/sales ratio.  Plotting this against average sales price going back to 2002 allows me to see how this ratio has correlated to price changes.  

In the past 10 years there have been two major turns in prices.   By looking at the pattern for the inventory/sales ratio around those pivotal times, you might be able to see if there are similar patterns forming today.

Since real estate is seasonal, you'll see the yearly ups and downs in prices and also absorption rates.  To smooth out this "noise" I do a 12 month moving average.  (FYI, my moving average for the average sales price is volume weighted).  

 

If you take some time to study the graph below you can see some really interesting things.

In Atlanta, you might define a "normal" market as what we experienced from 2002-2006.  We had steady price appreciation of about 3.5%/year.  You will notice the blue line(inventory/sales ratio) cycled up and down between 6 and 10 ( the channel created by my green lines, "Maitski Buy and Sell Lines").  The moving average of the inventory/sales ratio kept fairly steady around 7.5 .

 Look what happened when the blue line broke out of its channel and went up above 10 in 2007.  Several months later prices started to decline.  

Then when the blue line broke down under 6 in 2012, prices started to shoot up.  

Since the inventory/sales ratio is still well below its "normal" range, I would predict that home prices in Atlanta will continue to rise.  I wouldn't worry until the blue line begins approaching 10.  

I have generated charts like the one above for 37 local areas around Atlanta.   You can subscribe to my "Maitski Line Report" to receive monthly updates in all areas.

Things never repeat exactly as they have in the past, but with this tool, it should give you a valuable insight into what's happening in the market.  This is basic economics of supply and demand.  When either one changes it will change the price until a balance is reestablished.

There's more that goes into the buying/selling decision than just the investment side of it and life happens on it's own time line.  But what if you could have cashed out in 2006 and sat it out in a rental until 2012?   

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About the Author:  Tim Maitski has been a full time Realtor since 1999. He has sold several hundreds of homes in areas around metro Atlanta.  Tim started with RE/MAX Greater Atlanta and is now with Atlanta Communities Real Estate Brokerage.

 

Along with blogging on ActiveRain, he provides one of the best real estate websites in Atlanta at www.HomeAtlanta.com .

 

His proprietary  "Maitski Line Reports" chart out the absorption rates over the past 14 years in 37 different market areas.  Know when it's a good time to buy or a good time to sell.    

 

His online Property Tax Calculator allows you to compare property taxes in many counties and cities around the Atlanta area.  He provides the Atlanta MLS Power Search Tool that allows searches of homes using over 35 specific criteria.

 

Over the years, Tim has optimized his business so that he now can offer a huge 50% commission rebate to his buyers.  The more experience one gets, the easier the job becomes.

 

Tim also has a "Five Days to Sold" System that uses an intensive marketing blitz to create a showing frenzy that creates urgency and offers.

 

Tim is always looking to LinkIn with anyone who is interested in building their social network.

 

View Tim Maitski ●Atlanta Realtor●'s profile on LinkedIn

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Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Tim - you are impressively thorough. Excellent tool. The fun part is that it helps you dispel myths that so many buyers have, that the market will nosedive again and the 2012 prices will be again soon.

Nov 19, 2015 11:13 PM #1
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Tim Maitski
Atlanta Communities Real Estate Brokerage - Atlanta, GA
Truth, Excellence and a Good Deal

Jon,  Thank you. Earlier in the year it really did feel like a bubble was forming.  It was back to crazy bidding wars.  That's when I began trying to see if I could find some statistics that matched up with 2007.  I had never really followed absorption rates too closely but when I plotted it out going back to 2002, I was fascinated at what I saw. 

The reason I really have confidence in this indicator is the way the seasonal price cycles correlate so well with the seasonal cycles of the absorption rates.  Just about every year you get the same peaks and valleys lining up.

Nov 20, 2015 02:10 AM #2
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Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

I hate it. I wrote a long comment and then the page changed to a previously opened page and it is all gone.

I hope I will come back and write it again, but I am frustrated it happens. Right before I hit this "Post" button... ouch

Nov 21, 2015 09:48 AM #3
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Tim Maitski

Truth, Excellence and a Good Deal
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