Each month, the Colonial Times will present perspectives on the local real estate market from leaders in the Lexington real estate community
By Dani Fleming |
Frequently I get asked the question “How’s the Market?”. It’s a valid question be-cause, for most people, the most expensive asset they own is their home, or it’s the most expensive purchase they plan to make. So, it’s important to have a good understanding of the market dynamics at any point in time. Having an extensive back-ground in the Information Technology field, my approach to real estate is a ‘Data Driven’ one.
There are many pieces of information you can use to evaluate the health of the market. Key pieces of information to know are:
1. Inventory Levels
2. Trends in Average Sale prices over time
3. Absorption rates
4. Sales distributions.
There are others also, but these four topics will be covered in this and a future issue.
The graph shows the movement of inventory (homes on the market) over the last 6 years in Lexington. This graph can tell you many things. Note the seasonality reflected in the graph – in Jan 2011 inventory levels were very low, and as the spring market got underway inventory levels began increasing as more homeowners put their home on the market to sell. In May 2011, the number of homes on the market peaked and then began dropping as fewer sellers decided to sell and started thinking about their summer plans instead, yet buyers remained very active. The net result of fewer homes coming on the market, yet buyer activity continuing, is a reduction of homes available for sale. In July and August inventory levels hovered below the peaks of spring and autumn with occasional homes coming on the market and occasional purchases occurring. But, most buying and selling activity slows down during the summer months, increasing again in autumn when sellers and buyers again think about moving. The autumn market is shorter than spring, starting around September and finishing by Thanksgiving. After Thanksgiving many home sellers take their homes off the market for winter because of reduced buyer activity and this also means that they can bring their homes back on the market again in spring, fresh to the market. You can see the repeat of this scenario year after year, indicating a balanced cycle. In spring of 2009 we had very high peaks of inventory, but with subsequent lower peaks in the following years.
Seasonality in an inventory level graph indicates a ‘healthy’ market. When you are in an area with lots of foreclosures, short sales and oversupply of homes you don’t see seasonality of this type because the seasonal trends are ‘hidden’ amongst the clutter of the oversupply.
Reducing peaks of inventory levels also indicate a ‘healthy’ market. Declining inventory levels are an indicator of increasing prices – with the caveat that there are many indicators of what is happening with the market and you cannot review one in isolation; you have to review them all too truly understand what is happening.
Absorption rates tell us a huge amount of information about the current real estate market in a town. Using the sales data for the last 12 months, at any given price range, you can derive a rate of sales per month. The absorption rate calculates how many months it will take to sell the current inventory, assuming no more houses come on the market, at the same rate of sales that occurred in the prior 12 months. In other words, how many months will it take to sell what we have on the market? We generally say that any price range that has over 7 months supply has an ‘oversupply’ situation. Any price range under 7 months is in a balanced, ‘healthy’ state, and where we have less than 3 months supply we are in a ‘greater demand than supply’ situation. Note though that these figures change monthly. In winter when there is very little inventory on the market you tend to have ‘better’ absorption rates than in the peak of spring where a lot of homes have entered the market.
Reviewing Lexington’s absorption rates we can see that in every price range we are in a ‘healthy’ state of supply and demand. We don’t have any price ranges where we have over 7 months supply and in fact have many price ranges where we have less than 3 months supply. This supports what we are seeing ‘on the ground’ where we have very little inventory for all the buyers who are looking to move into, or within, Lexington. If you would like to discuss these statistics or review more, then please go to www.MAPropertisOn-line.com or call/email me at dani.flemig@MAProper-tiesOnlie.com or (617) 997 9145.