By now it’s widely recognized that our real estate
markets has changed. One popular indicator of
general market conditions is the median sales price.
At this point the median price not only does not tell a
very clear picture, but also completely misses the
story of what is happening in the market place.
Absorption – What’s That?
In real estate circles absorption is a term that
describes how quickly the market will absorb (sell
existing inventory) properties now for sale. In other
words, if there were 15 properties for sale and they
were selling at the rate of 5 per month, the
absorption period within which all might sell would be
3 months.
What Conclusions Can We Draw?
The
supply of homes for sale has increased at the
same time as demand has declined. The result on the
absorption rate is a dramatic increase. If prices stay
the same, the time it will take for homes to sell will
increase. Since it’s price movements that traditionally
bring supply and demand into equilibrium, it’s likely
that it will take reduced prices to trigger an increase
in demand and move the inventory more rapidly. As
prices decline further some sellers may withdraw from
the market, thereby reducing inventory and also
helping the market reach equilibrium.
Explaining Median Prices
Surprisingly the median home price, after some
erratic gyrations over the last 12 months stands
almost at the same level of the peak achieved in
August 2005. This would seem to contradict what
everyone is experiencing in the marketplace, which is
softness in home prices. The only logical explanation
is that the mix of homes sold has changed to include
more higher priced homes than lower priced ones,
thereby causing the median price to stay higher than
the everyday observation would expect.
