All Important Absorption Rate Drops Again…and That is a Good Thing

(Westcoe Realtors, Riverside, California)…For the 7th month in a row, the absorption rate for the Riverside area has fallen to a new low of 7.4, which indicates that our current real estate market is showing increasing strength well into 2008.  As many of you who read this blog on a regular basis already know, the absorption rate is a real-time measurement of the sales activity currently happening in our Riverside area (see posted blogs for 3/03 Riverside Absorption Rate Drops 5th Month in a Row, and 4/02 Absorption Rate Drops Again). Simplified, the rate is an indication of how long, in months, it would take to sell all the available homes for sale at the latest monthly sales rate, and this new rate has fallen to a low not seen in the Riverside area since July of 2006.

The absorption rate is a critical indicator of the direction of our current real estate market, and is calculated from MLS data through April 30, 2008.  The lower the rate, the faster properties are selling.  The chart below shows the data since January of this year.

Month          Active Properties          Pending Sales (previous month)          Absorption Rate

January            2706                                             154                                          18.0

February          2776                                              221                                          12.6

March               2837                                             317                                            8.8

April                  2733                                             368                                           7.4

The important item to note here is that this lowering of the absorption rate is due not to a decrease in the number of properties for sale, but instead to the increasing number of properties sold.  Since January, the number of pending sales in the Riverside area has grown from 154 to April’s total of 368…an increase of approximately 140%.  This increase in sales shows the rising strength of the Riverside real estate market, and validates what we have been saying on this blog for months…that our market is getting healthy at a far greater pace than the media would have you think. 

While the mainstream media would have everyone focus on the number of foreclosures as an indicator of market strength, foreclosures are a measurement of market forces that happened 3-9 months ago.  We have said for months that we are in the perfect storm for real estate growth, and the above numbers indicate we are correct.  The low interest rates coupled with lowering home prices have now made this a very affordable time to purchase for both the first time buyer and investor alike.  Many properties in the price range below approximately $325,000 are receiving multiple offers as buyers are seeing for themselves that these opportunities will not last forever. 

The good news is that for now, there is plenty of affordable inventory available as more and more buyers discover that waiting on the sidelines is not where they need to be.  No one rings a bell at the bottom of the real estate market, but as we have said before, anyone who purchases a home now will be incredibly thankful they did so 4-5 years from now.  Those who wait (assuming you can afford a home at this point) will pay the increasing prices that will result from “everyone” who will jump in and purchase at that later date.  By that time, the foreclosure properties available will have dwindled to a much smaller number, and prices will begin to rise because of the lack of inventory.

In the end, there is nothing happening here that has not happened before.  Home prices drop to incredibly low levels, smart buyers buy when most others are not, and then those smart buyers sit and reap the rewards of getting in early.  This real estate cycle has repeated itself over and over, and our current cycle appears to be no different.  Eventually, the market heals itself, the masses are told not be scared anymore, and then they all start to buy..thereby driving the prices up. 

The question you need to ask yourself is simply this…do I want to buy at the lower prices while others wait, or do I want to run with the herd and wait until prices rise and it becomes “safe”? 

Your call…but one look at the numbers from our MLS above, and you can see the results for yourself.  Call or email us if you have any questions or need any help in deciphering the current real estate maze.