Two weeks ago, we posted a blog which explained that current increases in home prices were the result of the well-known concept of supply & demand and should not lead to conversations of a new housing bubble. Today, we want to look at home prices as compared to current incomes.
Is it a Buyer’s or Seller’s Market?
In a balanced market, one that is neither in favor of buyers or sellers, there is six – seven months of inventory. In a buyer’s market, the amount of inventory is higher resulting in a market that leans in favor of buyers because they have more choices. Conversely, when the amount of inventory is lower the market leans in favor of sellers because buyers have fewer choices. Of course, this we call a seller’s market.
According to our friends at Investopedia.com, absorption rate “is the rate at which available homes are sold in a specific real estate market during a given time period”.
To calculate this, you divide the number of days in a time frame (30 days) by the number of sold listings in that time (1,150) to get the number of homes sold per day. This number includes all single family, town and patio homes and condos. Then, you multiply that number by the number of active listings (2,033) to get the absorption rate.
Take a look at the graph to the right, which shows a tremendous drop in inventory from July 2015 – February 2016.
As of this writing, in the Colorado Springs market there is less than two months of inventory, 53 days to be exact meaning, we are definitely in a seller’s market and have been for quite sometime, along with the entire nation for the most part.
Supply and Demand
Economic principles are such that prices are determined in great part by scarcity meaning, the less of something, the higher its price and real estate is no exception as we see home prices rising steadily in many parts of the country.
To illustrate this in the Colorado Springs market, median prices, that point at which exactly half are higher and half are lower than a set data point, have risen roughly 6.25% from Feb 2015 – Feb 2016 where the average home price has risen even higher to just about 8.2%.
This is called appreciation, which is just one of the many reasons to invest in real estate as opposed to other investment vehicles, such as deposit accounts, CD’s, mutual funds, etc., and certainly cars, big screen TV’s and the like.
Are We There Yet?
Though climbing due to market conditions, also consider that with interest rates at historic lows, the dream of home ownership is a reality for more consumers, even with the tighter lending restrictions that came about as a result of the market crash, though it is not unheard of for even those with challenged credit to still qualify for a home loan.
So, is now a good time to buy? A good time to sell? Yes!
On the one hand, buyers that are willing and able AKA qualified, and keep in mind qualified is a relative term, are well advised to heed the urgency of now to take the plunge into home ownership. And why not? Prices are rising, meaning now is the time to “buy low and sell high” as they say and take advantage of appreciation all while their affordability is maximized due to the current low-interest rate environment which may change in the future.
On the other, sellers have a unique value proposition: there aren’t that many of them around! This means their product (homes) are at a premium that if priced right can sell in days, sometimes hours and many times for more than their asking price!
Thanks for reading.