Why Seek A Balanced Real Estate Market
Real estate professionals seem to be in agreement that a balanced real estate market occurs when the relative supply of homes reach a 5 or 6 month level. Currently, there are about 2,300 homes for sale in Tallahassee (MLS real supply) and last year, just under 2,300 homes were sold in the Tallahassee MLS during the year, thus we can measure the "relative supply" of homes to be about 12 months.
Recently, a reader from Montreal, Qc., Canada wrote me with a few questions about the basis of using 5 to 6 months as the measure of a balanced market (meaning why 5 or 6, why not 7 or 8?). Michel wrote:
The reason I am writing you is because I am concern by the absorption rate (AR). I have done a lot of research on that particular tool but I never been able to determined why usually a normal market as a absorption between 4 and 6 (that is your observation). Many places claim that the normal (AR) is between 5 and 7, and here in the Greater Montreal Real Estate Board it is between 8 and 10.
Absorption Rate And A Balanced Real Estate Market
Of course, this is the very type of question that gets me thinking. Where did the magic number's come from? Did somebody just make this up and another fact and figure get created to fit the situation? Perhaps.
I did a little snooping around and did not find any mathematical justification for a balanced real estate market to be "measured," rather I found that most everywhere that real estate supply and demand is discussed, the local experts usually perceive balance at a level near 6 months of supply. But I suspect the real answer comes from a more important source.
When people are looking to buy a home in Tallahassee or anywhere for that matter, they have a certain level of expectation when it comes to choices and opportunities. My experience has shown me that when relative supply drops below 5 months, home prices rise faster (than normal) and it is a seller's market. I believe home buyers can feel the scarcity in the market at this point.
When relative supply exceeds 6 months, pricing pressure mounts and we see home prices rise slower (or fall) than normal. Apparently, at this level buyers can sense too many options in the market.
These are my observations, but maybe another real estate professional will chime in (using the comments section below) and help provide a basis for defining a balanced real estate market as one in which relative supply rests at 5 to 6 months.
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Could it have something to do with the typical life of a seller/real estate agent contract? Or maybe the life of a listing on the MLS?
Hey Steven, welcome back! I would think that ultimately it comes down to buyer perception. Whether a contract was a day or a year, buyers will react to scarcity (or glut) in the same manner as we would find in other commodity markets.
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