Topic du jour: Absorption Rate

Assuming you read the title, you probably have already figured out I'll be taking a look at Edmonton's absorption rate in today's entry... well done, go get yourself a hero cookie!

Many of you probably already know what absorption rate is, but for those who don't, it's basically just a measure of inventory turnover. Take the active listings at the end of a given month, divide that by the number of sales in said month, and voila, you have the absorption rate. So, in a nutshell it's the number of months it would take to completely turnover the existing inventory at present sales levels.

There is no one definition of just what absorption rate constitutes a buyers market, sellers market or a balanced market, but for the sake of this post we'll go with the CREB's take on it, since Calgary is pretty close to Edmonton when it comes to proximity, size, and government. They consider a sellers market to be 0-2.0, a balanced market to be 2.0-3.5 and a buyers markers to be 3.5 and beyond. Now, onto the show (as always, you can click on the image to get a look at a larger one)...

That was a look at the absorption rate in Edmonton over the last eight years. For the first five years it was fairly well balanced, sustained moderate fluctuations within a point into buyers or sellers territory, but generally stayed in the balanced range...

Then came 2006, and all hell broke loose. A major sellers market was established as the rate dipped well below 1.0 at a point and remained below 2.0 for over a year... then took off in the opposite record, blowing away all prior records and leaving us in this extreme buyers market where even relatively large dips in the rate still leave it well in excess of the prior record highs.

Now lets take a look at how this interacted with price, again we'll use the median price for a single family home in Edmonton as our measure of choice...

As you can see, up until '06 prices experienced a gradual upward trend as the absorption rate hovered around a balanced market, but as soon as we saw a deep and prolonged sellers market develop prices rocketed.

Trouble there being that attracted a lot of speculation and monumental construction as everyone tried to get their piece of the windfalls... and resulting from that the market ended up flooded when more and more people started getting priced out, sales started dropping but listings kept coming. The artificial demand caused not only prices to increase at an unsustainable level, but has also left the city significantly overbuilt... all of which adds up to an extreme buyers market.

Now a year and a half later we're left with record levels of inventory, slumping sales and as a result, and incredibly high absorption rate. So basically now all that's left is for price to drop, as that's the only thing that is going to be able to start clearing out all the inventory. Until we reach something remotely resembling a balanced market we're not going to see any increase in prices that add up to anything more then an aberration.