The First Sign of Correction of the Market

Comments made by the Frank D'Alessandro in Real Estate Section G of New-Press July 1, 2007

No one who is knowledgeable about this market can deny that our local residential market is over built.  So the real question should be what happens from here.

The first sign of correction when trying to restore ewuilibrium in the market is reducing the number of new residential units coming to market. 

Declining permit volume tells us that this has already started to occur, and permit declines will continue for the next year or more.  Reduced permitting is a positive sign that the market understands the problem and has taken the first step to correct it. 

Simultaneously we see a market valuation adjustment which is what a will buyer will pay a seller in an uncertain market.  This is also known as a buyers market. 

Again, we have certainly seen proof of the revaluation of real estate.  While this is a painful to those of us who won real estate, it must occur to restore supply and demand equilibrium. 

From here we will see a slow absorption and sales pace for a while longer.  It usually takes about one third of the available inventory to sell until the market stabilizes. 

At that time buyers realize their choices are being eliminated, and they start to sense some momentum is building for more sales.  The second third of existing inventory generally sells faster than the first third, because potential buyers sitting on the fence become believers and do not want to miss the so-called bottom and pay more. 

While there is no magic pill or easy answer, this is how past market downturns and the current one we are experiencing will play out. 

Keep in mind this downtourn may be longer than past ones due to the largest overhang of residential inventory I can remember in 26 years.  As mentioned frequently in this column over the last six years, real estate is a long-term investment.