Reprinted with permission of the Employee Relocation Council from March 2004 issue of MOBILITY magazine
The RAC Report
By Bradford E. Charnas, SRA
Relocation Appraisers and Consultants (RAC) is proud to present the RAC Report, a survey of residential market conditions in major markets across the country. What distinguishes the RAC Report from other market surveys is its focus on inventory supply analysis (also called absorption rate), that is, an analysis of how many months it will take to sell the current supply at the current rate of sales.
In other words, if there are 20 homes for sale and they are selling at a rate of only one per month, there is a 20-month inventory. And that conclusion assumes that no new homes come on the market during the 20-month period.
Why inventory supply analysis? Because other commonly used tools for measuring market conditions fail to reveal the magnitude of seriously over-supplied markets. This, in turn, can lead to greatly inflated estimates of value. This is especially true in the luxury home market, which is the very market where the potential for large resale loss is the greatest.
Multiple Listing Service (MLS) average market time analysis is the tool most often used to measure the relative strength or weakness of a market. Simply put, MLS calculates and publishes the average amount of time the homes in a particular location and price range took to sell. If the average marketing time in the subject property's neighborhood and price range has been under four months, it is tempting to believe that the subject property, too, will sell in less than four months.
Herein lies a core problem in using the average marketing time from MLS: most listing agreements are for between four and six months, after which, the listing expires. Those homes that are listed and do not produce a sale are not averaged into the MLS statistics. Given that, it is statistically unlikely that the average marketing time in a market area will ever exceed six months.
Take, for example, a home that is listed for $2 million for six months after which, the listing expires. It is then re-listed for $1,850,000 for another six months and expires again. Finally, it is reduced to $1,450,000 and sells after only one month for $1,200,000. In this example, the home was for sale for 13 months but MLS statistics will show only the one month. Clearly, the average market time analysis completely misses the severity of the oversupply in this price range.
In this report, you see three graphs for single-family dwellings in various regions of the United States. (Columbus, OH; Boston, MA, Atlanta, GA) In each graph, six separate price ranges are analyzed. Shown for each price range is the inventory supply, i.e., the number of months it would take to sell the current supply of homes. This is contrasted with the MLS statistics for the average number of months it has been taking to sell properties in that price range.
Referring to the report for Columbus, OH, the value of using inventory supply analysis becomes immediately apparent. In the more than $2,000,000 price range, MLS data shows that homes have been taking an average of 5.37 months to sell. However, looking deeper at the market using inventory supply analysis, we see that it would take 42 months to sell all the homes now for sale, not 5.37 months.
The graph also clearly illustrates a common phenomenon—a city can have a serious shortage of homes for sale in the lower price ranges at the same time that it has a significant oversupply in the luxury price range. What constitutes a significant oversupply? Generally speaking, the following standard should be applied to the inventory supply data:
Under 2.5 months = undersupplied
2.5 to 4.5 months = generally balanced
More than 4.5 months = oversupplied
By using MLS statistics for average market time to judge the strength of the luxury market, one would severely underestimate the extent of the surplus. This, in turn, would lead to a greatly inflated appraisal that would result in a substantial loss on resale. Such losses are becoming more common as the market is beginning to "cool" in many parts of the country. Both appraisers and those who review appraisals should ensure that their market analysis is based on inventory supply analysis in order to avoid unintentional over-valuations.
The complete RAC Report can be viewed at www.RAC.net or at www.erc.org. One point of interest is the fact that there are substantial regional differences throughout the country. The demand in Boston, MA, for instance, is quite high throughout all the price ranges. Even in the more than $2,000,000 price range, there is only a 7.2 month supply. Whereas Atlanta, GA, has a 26-month supply and Columbus has a 42-month supply in that same price range.
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Graphs
analyzing the inventory supply |
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· Atlanta · Boston · Columbus |
· Wichita |
I would like to acknowledge and sincerely thank the many RAC members who took the time, during this period of exceptionally heavy appraisal volume, to provide us with an analysis of market conditions in their respective metropolitan areas. Without their dedication, this undertaking would not have been possible. I also want to recognize Jan Hatfield-Goldman, Deborah Stadtler, and George Peterson of Worldwide ERC® and Douglas Weed of Weichert Relocation for their substantial contributions in framing the presentation of the data.
Bradford E. Charnas, SRA, is president and owner of Charnas & Associates, Cleveland, OH; president of Relocation Appraisers and Consultants (RAC); and a member of Worldwide ERC's Board of Directors. He can be reached at 440/526-2503 or e-mail Brad@CharnasAppraisal.com.