Wednesday, July 30, 2008
Real Estate and Stocks Have A Lot In Common
A good friend of mine, following a tip from a buddy of his, has been looking into buying a condominium in warm beach front community with the idea of using it as an investment property until he retires. Not a bad plan.
What concerned me is that Mike stated that "condo's in this area were selling at 50% of value". To which I replied, condo's are more likely selling at 100% of market value, it just happens that the current market value is half of what it was previously.
Real estate, like stocks, are greatly impacted by supply and demand influences. This is an intangible influence that has nothing to do with the physical aspects of the property. Based on Mike's statement with regard to the declining values of condo's in the market area that he was researching, it may be that the supply of condominiums dramatically exceeds demand which has a downward pressure on values. This has been a common occurrence in many markets.
A level of inventory that exceeds a 6 months supply is generally considered to be an over supply, a.k.a. a buyers market. How can you make this determination? A simple method is to obtain the number of sales in a defined market area that "sold" (contract date) during period of time, say one year. In this instance, the number of sales is divided by 12 to determine the average number of sales per month, otherwise referred to as the absorption rate. Then, the number of active listings in the same market area is divided by the average monthly sales, the conclusion of which is the level of inventory in terms of months. For example, there have been 120 sales in a neighborhood during the past twelve months, an average of 10 sales per month. There are currently 75 active listings in the neighborhood. This calculates to a 7.5 month supply of inventory at this absorption rate, which is an over supply.
Like buying stocks, the objective with real estate is to buy low and sell high. With regard to the condominiums by the beach, it just might be a good time to buy, particularly if it is a long term investment and the condo has a great view!