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Three Cents Worth: Absorption Makes Us Bloated

[This week, chartman Jonathan Miller digs into absorption rates and days on market, giving us a flavor for just how long it takes to sell an apartment these days. The full rundown below. Click on the image to expand.]

This week I looked at the absorption of all apartments (i.e., new development, existing, co-ops and condos) into the market and tracked their average days on market as well. I estimated the 2nd quarter through the end of May from the preliminary numbers we have, which may change. The black dotted line represents the 5-year average of both indicators.

Days on Market (red line) is measured by the number of days from the last price change, if any, to the contract date. The indicator (aka the time it takes to sell an apartment once it is priced correctly) has averaged 123 days over the past 5 years and is now approaching 150 days. We would expect a balanced market to fall within 120 to 150 days and since these are overall market statistics, a large portion of the market would be classified as a buyer's market. The days on market line in this chart correlates with the ebb and flow of absorption. That is, an expanding marketing period for apartments occurs during a period of rising inventory.

Absorption (purple bars) is defined as the number of months it would take to sell out all existing inventory, assuming the same rate of sales occurs in the current month, assuming no new inventory was added to market. It's a good way to see how lean or bloated inventory is. Rising inventory, in and of itself, is not necessarily worrisome if demand is matching or exceeding it. However absorption has hovered around the 11 month level for the past 3 quarters, well above the 6.9 month average over the past 5 years. The chart shows how the quickly the market is seeing a build-up of inventory and that current demand is not keeping up with available supply.
· Absorption Rates/Days on Market [Miller Samuel]