2009 in Review, Part I

One of the great things about this time of year is that we are presented with information on how the housing market faired in the previous year. As everyone knows, 2009 will be forgettable for a variety of reasons. One thing we are hoping it will be remembered for, however, is that it was likely the bottom of the current real estate sales swoon.

The market trend I want to discuss in this first post of 2010 is absorption rates. An absorption rate measures the amount of inventory (supply) versus the number of sales (demand). In real estate, these rates are usually reported as the number of months of current sales activity needed to absorb the number of listings presently on the market. According to housing experts at the National Association of Realtors and other groups, a "normal" absorption rate is somewhere around 6 months. Anything less than that starts to be considered a "seller's market" where there are fewer homes to choose from and prices hold firm. Rates higher than that usually signals a "buyer's market" where there are more choices and prices tend to fall, or at least not rise as quickly. This is probably a bit of an oversimplification, but I think you get the point.

So where have we been and what is the trend as we look ahead. I ran a report that shows months of inventory over the past 5 quarters: 4th Quarter, 2008 through 4th Quarter, 2009. My study area was Eastern Racine County (East of I-94), all single-family residential listings and all price ranges. The results were encouraging for those of us looking for an uptick in activity. In the 4th Quarter of 2008, the Months of Inventory was 13.6 months. That number peaked in the 1st Quarter of 2009 at 17.2 months and it has been falling ever since: 11.3 months in Quarter 2; 9.7 months in Quarter 3 and 8.4 months in Quarter 4. If this trend continues, we could expect that the real estate market may be returning to a normal level. Of course, there are many things that will affect this, not the least of which are employment trends, but it does give us some sign of hope as we move into the new year.

As you might expect, however, different price levels produce different results. In 2009, there was much discussion about sales of foreclosures, short sales and the need for sellers to get out from under a mortgage that was no longer affordable. While this trend crossed all price ranges, it seems to have had the biggest impact on the lower end of the housing value spectrum. In addition, the first-time buyer tax credit, scheduled to end on Nov. 30, 2009 but now extended to Apr. 30, 2010, likely had a larger affect on lower priced homes than on higher priced ones. A look at absorption rates from 3 single-family market segments seems to bear this out. With single-family homes priced at $100,000 or less, the months of inventory rates ranged from a high of 12.5 months in 4th Quarter, 2008 to 6.1 months in 4th Quarter, 2009. That is a reduction of over 6 months. Listings priced between $100,000 and $250,000 ranged from a high of 13.1 months in 4th Quarter, 2008 to 7.9 months in 4th Quarter, 2009. Finally, the higher end of the market, defined here as listings priced over $250,000, continues to struggle. In the 4th Quarter of 2008, there was a 21.2 month supply of listings. That number trended downward to 13.5 months in the 3rd Quarter, 2009 only to rise in the 4th to 28.6 months. If a recovery is under way, it may be reasonable to expect that the sellers of lower priced listings will purchase higher priced listings. This presupposes, however, that sellers of these lower priced listings are capable and/or interested in upgrading. It is certainly possible that many people will be out of the home ownership market as they repair their credit. It is also likely that some sellers will take this opportunity to downsize.

Of course, absorption rates do not tell the entire story. A real estate market is affected by a number of factors. and, as is seen in the above data, each market has several sub-markets that may be effected differently. In future posts I will try to bring other measurements that may help us understand what is happening in real estate in Racine. While it will be impossible to predict every nuance of every market and sub-market, it is worth noting that most markets historically act in somewhat predictable ways. It should be interesting to watch and I hope you continue to join me for the ride.