Rising Supply and Falling Prices… The Definition of an Unhealthy Market

On December 29th, The Tampa Tribune reported some "good" news: more homes are selling in Tampa Bay than in any other region in Florida. Throughout the article, Realtors and Economists are quoted as saying what a positive indicator this is for the region - how the Tampa real estate market is "stabilizing" and "equalizing" and other such platitudes. As an Economist and an MBA myself, let me weigh in on this debate, because the article and the information contained therein is highly misleading.

By no means is an up-tick in sales definitive proof of market stabilization. At lower prices, sales will naturally increase - there comes a point where value received is so far in excess of price paid that even the most novice investor will see the advantages of investing.

But a lower price is also an indicator of oversupply which we've got in spades in Tampa Bay. In fact Home Encounter data shows that December 2007 listings outpaced December 2007 sales locally at a rate of 2.75:1. Combine growing supply with falling prices and we've got a market that's actually worsening - that's not improving at all! As supply continues to balloon - which it will, as it's showing no signs of stopping - prices must continue to fall in order to attract buyer attention.

The Tribune article quotes Nick Davis - a local Realtor - as saying that he's seeing "an up-tick in sales as long as sellers are willing to drop their asking prices." Dear readers, this is the antithesis of a strong market. A strong market is one where sellers do not have to drop their asking price in order to sell. A strong market is one where prices hold their own; where appreciation is reasonable; where supply is under control and where value received is roughly equal to price paid.

"Always Low Prices, Always!" may work for Wal-Mart in driving volume (and thereby profits), but the same strategy spells death for a real estate market. We need to see a little less Wal-Mart and a little more Nordstroms in Tampa Bay in order for us to be willing to say that we've reached the bottom of this market cycle.