Supply and Demand in Real Estate

The real estate market, like other markets, is driven by the economic principle of supply and demand.

Simply put, the absorption rate is the measure of today’s housing, or demand, versus how many months will it take to absorb the current supply of inventory.

The formula uses the past 12 months of unit sales to establish how many houses are selling each month on average, divided into the existing inventory to calculate the months of supply available.

In real estate it is generally thought to be a balanced market when there are 5-6 months of inventory on the market. A key point to keep in mind: fewer months of supply result in a seller’s market and puts pressure on prices to increase. Higher months of supply result in a buyer’s market and puts pressure on prices to fall.

A seller’s market was evident locally, in the period of 2000-2006 as demand was high and supply was low. During this period of time the New Hanover County market was operating as a seller’s market with 1-2 months of supply at its peak which occurred in the first quarter 2006. By late 2006-2007, inventories rose to seven months of supply, or a balanced market; and since 2008 the market has become a buyer’s market with current inventories running around a 16 month supply.

Within New Hanover County the absorption rate varies by location. In the Ogden/Porters Neck, Castle Hayne and Myrtle Grove/Monkey Junction areas housing inventory is turning more quickly based in part on the lower average price points and the positive effect that the first time home buyers tax credits had in 2008. Other areas like Wrightsville Beach, Pleasure Island and parts of downtown Wilmington show a higher inventory based in part on the higher average price points of those locations which at present are turning slower.

The positive effect of the tax credits continues into 2010. The first time home buyers will benefit from the $8,000 tax credit on their purchases that most affect the $280,000 and lower purchase price points. Additionally in 2010 existing homeowners can benefit for tax credits up to $6,500 on purchases at price points of $800,000 or less. (Contact your Realtor to understand how these benefits may affect your purchase decisions.)

Buyers are coming back to the market attracted by an abundant selection, value and historically low interest rates.

With current levels of inventory, selection has never been better.

Values are wonderful. Value is determined by condition, price and location of product. As always, the properties that sell the quickest are those that are the best value to buyers.

Interest rates are at historical lows and yes, banks and mortgage companies are lending money. Generally today’s lending market requires that you put some money down and qualifying has been tightened to eliminate the aggressive hybrid sub prime lending of the past few years which included an abundance of 100 percent loans and low documentation requirements. Today’s interest rates are being artificially held low by the current policies of the federal government. It is generally believed that these rates can not last long term and there is much more pressure for rates to increase than stay at these low levels.

The effect of interest rates has a bigger effect on a buyer’s purchase decision than purchase price. A quarter of a percent increase in interest rates can eat up quickly a reduction in purchase price.

Based on all these factors, now is an excellent time to buy. I think we have all had an experience personally or had someone close to us experience a situation in which the memory is, “I could have purchased that property in _____ for only $_____.” Some will be talking about 2010 in that way 10 years from now.

 

Today’s sellers are divided into two groups:

Group one is those individuals that want or need to move and will price their homes aggressively to sell while taking advantage of this same buyer’s market to purchase their next home. As long as you are staying in the market, there is very little reason to not be in the home you want or need.

The second group of sellers will be those that stay in a location and wait for the market to return to the peaks of 2005-2006. Increasingly financial resources are calling for a slow but steady recovery. The forecasted recovery for North Carolina ranges in time from 2014-2017. Several national sources expect the recovery to take twice the length of time as the decline. If we bottom out in mid 2010 then the projected recovery fits the range cited above.

Just as so many other financial decisions, too many purchasers miss an opportunity by trying to time the absolute bottom of the market. Real estate is best considered as a long term investment and on the North Carolina coast the future looks bright. Last year, Senator Richard Burr shared with local Wilmington business leaders that as the federal government looked at the long term need of infrastructure by state, that population growth predictions called for a 50-plus percent growth in the population of North Carolina by the early 2020s.

The growth in North Carolina comes from the recognized superior quality of life factors that North Carolina offers such as climate and cost of living.

Another significant factor for North Carolina growth comes from the strength of secondary education in North Carolina’s universities, colleges and community college system. North Carolina is second only to California in the number of graduates each year. The students that come to the state often don’t want to leave, creating an intellectual capital that attracts business and industry.

All said and done, the recent events in the real estate market seem to be short term in nature, while the long term future looks bright.

Article by Chris Livengood, VP of Sales at Intracoastal Realty

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