Why Do Absorption Rates Matter?

Recently, we started publishing absorption rates, as a way to judge the health of the Connecticut housing market.  We knew instinctively that things were not as robust here as they are in other states and regions.  It's hard to tell, however, by using average sales prices, which reflect so many other variables, or even average units sold.  That number is influenced by weather, timing, mortgages, and demographics.

While absorption rates take those factors into account as well, they level the playing field in a way.  So, if the Southwest has twice the supply, but also twice the number of buyers, the absorption rate will be more or less the same.  Absorption rate is simply the number of months it would take to sell every house on the market, at the current rate of sales.  Therefore, if it seems that there are a lot of houses on the market that aren't selling because they are stale, overpriced, or undesirable in some way, that shouldn't matter, because every region has those same types of houses.  The only way that the absorption rate would change compared to another area is if, for some reason, many more of them existed in one market vs. another.  While that could happen, it is usually pretty constant.  Sales that fall through due to contingencies, especially mortgages, also would be fairly constant by location.

That all means that, when Connecticut has twice the absorption rate of the national number (8 months' supply vs. 4 nationally), it means that our recovery is lagging.  Although we knew that, this statistic gives us a good proxy for the strength of the housing market in general.  So San Francisco, with 15 days of supply, is obviously a hot market.

Our market, while not in that category, is also improving.  You can see from my recent blog post that our absorption rate here is dropping.  We don't actually want it to approach San Francisco's rate, since that's a market too hot for most buyers to handle.  The most important fact to note is that we are trending down, so our market is improving.  When we get to a reasonable level of four months or so, we'd be happy to stay there for the foreseeable future, because that would be a balanced level of supply and demand.  And, at current trend rates, we're not far away.

A New Problem

I've written before about how many sales are now for cash.  It's ironic, because mortgage rates are still really  low; however, it's hard enough for most people to get a mortgage, both because of credit issues and because of the paperwork requirements and timing, that many are choosing to go the cash route.  Some of those people may go back and refinance later, but they are showing up at the closing table with cash.  56% of our sales in the first four months of the year were for cash!  And that's true around the country, although in some places,  it's due to multiple bids on insufficient inventory, leading to cash offers as a tactic to secure the property by nervous buyers.

 We never thought we'd say this, but the change in closing dates has brought challenges that we couldn't imagine.  One of those is that personal checks, given by buyers as deposits on sales, don't always have time to clear our escrow accounts before the closings.  The big rush to close has been exacerbated, both for weather reasons (a slow start to the selling season and the need to close during the summer), and because many more people are choosing to cut out contingencies as a bargaining chip, so they have fewer things to do before they close.  Also, there are lots of investors, who are buying at what they perceive to be bargain prices, and who may be planning to renovate anyway.

That's what we love about real estate--there's a new set of challenges in every kind of market!

Absorption Rates (June 1st, 2013)