The Right Time to Buy May Be Now

Seventy homes are in escrow here in South Lake Tahoe. It hasn’t been since September 2005 that we’ve seen that many homes pending. Over the last few years, a lot of people have been waiting for the right time to buy. It seems that many think that time is now. I’m really beginning to agree with them. Here are a few good reasons why it may be time to buy:

1. Interest Rates Will Go Up

Interest rates are low these days. They have no where to go but up and with inflation skyrocketing, the Federal Open Market Committee has a lot of incentive to raise rates. When this happens mortgage rates will increase, which means homebuyers’ dollars won’t go as far. Assume you can afford a $400,000 home with today’s rates. If interest rates increase by a single point, you’ll then be able to afford a $368,000 home. That single point will sap you of 8% of your buying power!

2. The Market Can’t Down Cycle Forever, Especially in Tahoe

The South Lake Tahoe housing market has seen a 25% correction since August 2005. Can prices really drop much further? I have no crystal ball, but we will eventually hit the bottom. With a limited supply of homes in the Lake Tahoe basin and an ever-increasing demand, we should hit bottom before many other areas.

3. It Is Better to Buy in a Buyer’s Market!

Those who are waiting for the market to hit rock bottom before buying are doing themselves a disservice. Buying a home isn’t only about getting the best deal possible. It’s about finding a home you can truly enjoy living in. With the number of homes on today’s market, you should be able to find what you want when it comes to location, condition, and quality. Finding that special home on tomorrow’s market could be much more difficult.

4. It’s a Home, Not a Stock

You’re buying something you will live in. Unlike a stock, bond, or commodity, your home will have utility. You’ll grow attached to it. And if you hold onto your home for a while, it’s pretty much guaranteed to increase in value.

Posted on July 26, 2008 at 3:06 pm
Drew Kondo | Category: Market Trends | Tagged , , , ,

Months Supply of Inventory (MSI) and Absorption Rates in Real Estate

I love real estate statistics. I got a math degree from the University of Texas, so I could make a career of real estate stats. In this blog, I’ll keep things relatively simple.

In efforts to improve the statistics I present you, I am beginning to mine for and calculate absorption rates and months supplies of inventory for you. These stats are important because they reflect how a market is doing. They also help savvy buyers and sellers establish and meet their goals.

Absorption rate – the rate at which real estate is sold, or absorbed, in a specific area

I calculate absorption rates in terms of homes sold per month. Thus, for South Lake Tahoe the absorption rate is the number of homes sold in the last year, 341, divided by the months in a year, twelve. 28.4 homes are sold per month in South Lake Tahoe. This is the absorption rate. (Feel free to skip the rest of this paragraph.) Some people like to express absorption rates in relation to the amount of inventory. Our inventory in South Lake Tahoe is 476 homes. Thus, 28.4 homes is 5.97% of the inventory; so the absorption rate is 5.97% of the inventory per month.

Months supply of inventory (MSI) – an estimation of how long it will take for all the market’s homes to be sold, or absorbed, based on how many homes are currently on the market and the rate homes have sold in the past (absorption rate).

This is pretty simple. If 28.4 homes are sold per month in South Lake Tahoe, how long will it take to sell 476 homes? Divide homes by homes sold per month (476/28.4 = ???). It will take 16.76 months to sell all the houses. This is the months supply of inventory (MSI). You may now be asking, “Who cares? New homes are listed all the time. You’ll never sell the entire inventory in South Lake Tahoe.”

This is true. MSI is simply used to compare the size of an inventory to the rate of sale. This is very important. MSI is a great indicator of how balanced a market is.

MSI less than 5 months = seller’s market
MSI equals 5-7 months = balanced market
MSI greater than 7 months = buyer’s market

These guidelines are not fool-proof. Notice in the table below there is a 6.7 month supply of inventory in the sub-$300,000 price band in South Lake Tahoe. Any seller in this price band will tell you it’s not a balanced market. The buyers continue to call the shots. The MSI stat was skewed in this price band by desperate sellers, especially banks, who bent over backward in the last year for buyers. Thus, the absorption rate was increased, which decreased the MSI.

So how can these stats help you? I’ll preface the answer by saying that no mathematical model can be used to determine what will happen in real estate. There are way too many factors involved. That having been said …

For sellers, these stats will tell you how much competition you have. Let’s consider a seller with a $1,500,000 listing in South Lake Tahoe. With almost 33 months of inventory, he better think about some serious price reductions if he wants to sell soon. The seller with a sub-$500,000 listing (6.7-13.3 months of inventory) should also think about a price cut. However, there is a greater chance he’ll get lucky and find a buyer who loves his home and qualifies for a loan.

For buyers, MSI will tell you how negotiable sellers may be in different markets. If there are 3.5 months of inventory in Bangladesh and 10.2 months of inventory in Baghdad, the sellers in Baghdad will probably be more negotiable.

If you have questions about these statistics feel free to comment, e-mail me (dkondo@chaseinternational.com), or call me (530-545-1831).

South Lake Tahoe real estate statistics as of 7/1/2008

Price Range
Active Listings
Absorption Rate in sales/mo. (% of inventory) Months Supply of Inventory
$0 – $300,000
32
4.75 (14.84%)
6.7
$300,001-$500,000
173
13.00 (7.51%)
13.3
$500,001- $750,000
127
6.33 (4.99%)
20.1
$750,001- $1,000,000
68
2.50 (3.68%)
27.2
$1,000,001- $2,000,000
57
1.75 (3.07%)
32.6
$2,000,001 and up
16
0.08 (0.52%)
192
Posted on July 7, 2008 at 5:39 pm
Drew Kondo | Category: Statistics | Tagged , , , , , ,