UNDERSTANDINGABSORPTION RATESThe effects of Supply and Demand in the Houston area
“AbsorptionRates"is a fancy wayof describingtheLaw of“Supply andDemand"
“Supply and Demand"Home prices in real estate are a matter of supplyand demand as with other industries.Greater supply = less demand = less valueLesser supply = more demand = greater value
“Supply and Demand“ Can be calculated for a city, area of town, zip code or even a neighborhood.SUPPLY: How many unsold listings are on themarket(Active listings) VS.DEMAND: How great of a demand there is for them(The number being sold in a specified time frame.)
MONTHS OF INVENTORY (and Absorption Rates)Months of Inventory is the number ofmonths it would take to sell the existinghomes on the market based on thepresent rate of sales.
MONTHS OF INVENTORY Getting StartedCalculating the figures:You need to know 2 numbers.1) How many listings are currently on the market2) How many listings sold in a certain time period (12 months, 6 months, etc)
MONTHS OF INVENTORY Example for 6 months Sample Neighborhood Data1. Number sold in 12 months (1811) /12 months = 1512. Homes on market (479)/Absorption rate (151) = 3.2 Based on 6 months of sales, it would take an average of 6 months to sell the existing homes on the market in this area.
DEFINITION OF MARKETS A NORMAL MARKET 6 months inventorySix months inventory indicates a balanced market. Less than 6 isa sellers market and more than 6 is a buyers market.Normal Market - In a normal market there is a 6 month supplyof homes where the number of listings about equals the numberof buyers.
DEFINITION OF MARKETS A SELLERS MARKET < 6 months inventorySellers Market - In a sellers market there is less than 6 monthssupply of homes.This is in relation to “Supply and Demand”. Since there arefewer homes to choose from, sellers are more in control andbuyers may have to be willing to pay top dollar to get the homethat they want. In a seller’s market it is not uncommon to seemultiple offers on a home.
DEFINITION OF MARKETS A BUYERS MARKET > 6 months inventoryBuyers Market - In a buyers market there is more than 6months supply of homes.Supply is great and buyers are more in control since there are somany more homes to choose from. It is not uncommon forsellers to offer incentives – such as contributing to the buyersclosing cost – to attract buyers to their home.
MARKET TRENDSHome prices in real estate are a matter of supply and demand aswith other industries. These numbers may change due to:(1) The time of year – consider summer sales vs winter sales(2) The economy – both local and globalTo assess sales trends, you can also calculate numbersover shorter six- and three-month periods.
TRENDING – Compare by time periodsHere is an area of town where the local economy has been favorable.Months of Inventory based on:12 months of sales – 7.3 months 6 months of sales – 5.5 months 3 months of sales – 4.5 months
TRENDING – Compare by other variablesMonths of Inventory can also be calculatedwith other variables:1. Price ranges2. One story vs two story3. Features such as golf course lot, or pool
Call or email ifyou would like to know the Months of Inventory for your area.