How quickly is inventory moving? What does it mean for me?

These are awesome questions asked more and more by the most sophisticated buyers and sellers.

Typically, when buyers and sellers want to know, how quickly is inventory moving, they are typically questioning what the “absorption rate” is and how many months of inventory is there at a particular time and within a particular price range or even property type.

In other words, how fast is the current inventory being absorbed by buyers and how long would it take to clear that inventory if the same pace is kept and no other new property came to market?

Notice the caveat of no new inventory coming to market being an assumption. An impossible assumption since inventory is in constant movement. This however, is akin to looking at a Balance Sheet for a corporation, knowing full well that money continues to flow in and out of their books throughout the day. It is simply, a market “snapshot” of where we are and where might we be if we keep the pace, or like a single frame from a movie film.

In short, Months of Inventory is the number of months it would take for all active listings to sell, if no new properties came on the market and considering the current absorption rate or selling pace, based on the number of closed sales in the prior month (we can do this per week or per month – I’ll be looking at monthly figures).

Through a fairly simple formula, one can determine absorption rate. But, before you pull your calculator, you must keep in mind that this rate is as typical to a city, county or state as there are cities, counties and states. In other words, it is a very local number. So local in fact that, if you live in a heavy condo market area (such as South Beach or Manhattan), this number can be as different for each building as there are buildings in the area.

In short, the absorption rate for Miami-Dade county can then be broken down by city, building and even by property types and/or price ranges, giving us a wide array of possible numbers specific to the needs of the person seeking the information.

The other caveat is that, this number can be very different if calculated based on “closed” transactions as it is based on “pending” sales. Some believe that looking at pending sales provides a better indication of market activity because it lets us know where and which properties are being actively pursued by buyers since pending sales reflect contract offers made on available properties and hints on buyer preferences and tendencies.

Closed sales however, provide a solid indication of which areas and which properties are actually changing hands. The problem with closed sales is the amount of time they may be taking to go from offer tendered and accepted to keys exchanged, specially when a short sale is involved.

Both are equally important since in combination, they indicate past performance and possible trends.

Therefore, I’m only going to generalize on this number based on a few generic criteria for our County (Miami-Dade), in order to give you an indication of where we are as far as moving the inventory is concerned.

Therefore, I will provide the numbers for pending and for closed sales and will consider condo and detached single family homes in order to drive the point further.

Please remember that these statistics ( absorption rate and months of inventory) are  flawed by their very nature since they only take into consideration recent past performance at a given point in time and they mostly look backwards (past-dependent). Based on these numbers, we can only guesstimate future performance. Therefore, use this statistic carefully when evaluating your real estate opportunities since they only provide guidance for you to form an educated guess.

These number however, do have significant meaning for buyers, investors and sellers.

For buyers/investors – higher months of inventory number means inventory is rising and that your chances of getting a “deal” increases.

For sellers – a higher number typically means more competition from other sellers and that you better make sure your marketing strategy (which includes pricing among other things), is in line with market conditions (specially if you are in a ‘buyer’s market’), or else, you may be helping your neighbor sell first!

So now, to the nuts & bolts. The chart below reflects the numbers for September/08, which we will compare with September/09, as well as August/09 to compare with last month’s numbers (09/09).

Note below the one month and year-over-year changes in active, sold and pending transactions.

1 month                                                            1 year

Aug 09             Sep 09            % Change        Sep 08             Sep 09             % Change

For Sale                27083              26296              -2.9%            41230              26296              -36.2%

Sold                          1702                1535                -9.8%            1126                1535                  36.3%

Pended                   2762                2949                  6.8%           1458                2949                102.3%

Now, let’s drill down a bit more and notice the absorption rate and the months of inventory changes for the same time periods in Miami-Dade County.

	9/08	8/09	9/09
or Sale	41230	27083	26296
New Listing	6053	4466	4659
Sold	1126	1702	1535
Pended	1458	2762	2949
Months of Inventory based on Closed Sales	36.6	15.9	17.1
Months of Inventory based on Pended Sales	28.3	9.8	8.9
Absorption Rate based on Closed Sales	2.7	6.3	5.8
Absorption Rate based on Pended Sales	3.5	10.2	11.2
Days on Market	119	113	111
Median Price	230	155	160

Notice as well that county-wide, Median Prices have dropped almost 44% from a year ago, even though we can see a 3% increase from August, 2009 to September 2009.

This significant drop in price year-over-year is certainly stimulating (albeit any tax incentives our government is throwing into the mix), buyers to come out, causing the rate of absorption to increase from 3.5 properties per month in September/08 to 11.2 per month in September/09 or over 300% faster pace of absorption.

This in turn, has caused our months of inventory for our county to drop from 28.3 a year ago to 8.9 months in September/09 or an almost equally impressive 300% decrease in the amount of time it takes to clear the inventory.

If we drill down a bit more and look at single family detached homes, the months of inventory based on pending sales for these types of homes was 22.6 a year ago versus 6.8 for September/09 representing about a 323% drop while the absorption rate improved by about 330% or from 4.4 properties sold/month a year ago up to 14.8 properties per month in September/09.

Our attached single family residences (which includes condos and townhomes), reflect a 126% improvement in Pending Transactions year-over-year, in a great part caused by a drop in Median Prices from $200k down to $135k for September/09. This causes a higher level of affordability for first-time buyers since the median price for a detached single family home is $182k (down from $256k a year ago).

Therefore, the absorption rate for condos & townhomes based on Pending Transactions has gone form 2.9 units per month to 9.4 units per month, bringing the months of inventory based on pending sales down to 10.7 from 34.3 in September/08.

Although the numbers for condo/townhomes may seem less impressive than that for detached homes, this may also reflect a preference among buyers to stretch their finances a little more in order to own a detached home before selecting a condo or townhouse. A smart move by some account.

Another factor affecting condo sales is that many buildings are no longer financeable because they no longer meet FNMA or FHA lending guidelines. Buyers of these units must seek to pay cash (which many are), or seek portfolio lenders (which typically cost more).

First time buyers should do their best to get into a home if it makes financial sense to them (remember to consult a tax professional and a reputable real estate and mortgage professional when making these decisions), specially when faced with the reality that, for the next several years, rather than continuing to pay rent (to pay off someone else’s mortgage), they should think about paying themselves and take the tax deductions homeownership afford you (even if not able to close by the tax credit deadline of November 30th and depending on your tax profesional’s advise).

A last remark about Median Prices is to remember that, about 60+% of Pending and Closed transactions are distressed properties (Short Sales and REO), which keep driving prices down as buyers take advantage of these opportunities and buy real estate “on sale” (just the way we like to shop, ain’t it?). The rest are being sold by developers with unsold inventory and folks not interested in dealing with the nuances of distressed sale purchases.

Even though the above may seem like the worst is behind us, we must still keep in mind that many experts still foresee an increase in foreclosure inventory coming for 2010 and 2011 following resets associated with ARM (Adjustable Rate Mortgages), and Option ARMs sold 3-5 years ago.

For buyers, this means additional opportunities. For sellers, this may mean that the time it would take to get that price they seek (at 2005, 2006 or 2007 numbers), may be much longer away than they might think. Not working with the right professionals could cost these sellers thousands if they choose to wait.

If you wish to know what the absorption rate or months of inventory is for your specific area and how to use this date to fit your specific needs and goals, contact me and I will gladly help you.

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Your comments welcomed!

Date	7/08	8/08	9/08	10/08	11/08	12/08	1/09	2/09	3/09	4/09	5/09	6/09	7/09	8/09	9/09
For Sale	41794	41101	41230	39965	39240	37625	36418	35744	34123	32280	31159	29408	28059	27083	26296
New Listing	6509	5914	6053	5683	4757	4761	5561	4875	5303	4738	4550	4529	4331	4466	4659
Sold	1171	1122	1126	1277	1069	1449	1199	1251	1625	1671	1722	1981	1870	1702	1535
Pended	1473	1547	1458	1663	1360	1595	1781	1923	2480	2533	2491	2658	2635	2762	2949
Months of Inventory based on Closed Sales	35.7	36.6	36.6	31.3	36.7	26.0	30.4	28.6	21.0	19.3	18.1	14.8	15.0	15.9	17.1
Months of Inventory based on Pended Sales	28.4	26.6	28.3	24.0	28.9	23.6	20.4	18.6	13.8	12.7	12.5	11.1	10.6	9.8	8.9
Absorption Rate based on Closed Sales	2.8	2.7	2.7	3.2	2.7	3.9	3.3	3.5	4.8	5.2	5.5	6.7	6.7	6.3	5.8
Absorption Rate based on Pended Sales	3.5	3.8	3.5	4.2	3.5	4.2	4.9	5.4	7.3	7.8	8.0	9.0	9.4	10.2	11.2
Avg. Active Price	510	505	505	504	512	515	519	525	533	543	548	547	545	549	552
Avg. Sld Price	454	391	341	323	292	301	264	240	265	229	269	281	253	258	293
Avg. Sq. Ft. Price	250	229	213	192	176	185	168	152	162	150	164	171	158	159	179
Sold/List Diff. %	91	91	91	90	89	89	89	90	90	89	89	89	90	90	88
Days on Market	127	122	119	113	101	108	106	114	114	107	113	117	114	113	111
Median Price	272	235	230	210	190	188	164	161	165	145	154	160	155	155	160