UNDERSTANDING ABSORPTION RATES The effects of Supply and Demand in the Houston area
“ Absorption Rates" is a fancy way of describing the Law of “Supply and Demand"
“ Supply and Demand" Home prices in real estate are a matter of supply and demand as with other industries. Greater supply = less demand = less value Lesser supply = more demand = greater value
SUPPLY: How many unsold listings are on the market (Active listings) VS. DEMAND: How great of a demand there is for them (The number being sold in a specified time frame.) “ Supply and Demand“ Can be calculated for a city, area of town, zip code or even a neighborhood.
Months of Inventory is the number of months it would take to sell the existing homes on the market based on the present rate of sales . MONTHS OF INVENTORY (and Absorption Rates)
Calculating the figures: You need to know 2 numbers. 1) How many listings are currently on the market 2) How many listings sold in a certain time period (12 months, 6 months, etc) MONTHS OF INVENTORY Getting Started
MONTHS OF INVENTORY Example for 6 months THE WOODLANDS (as of June 2011) <ul><li>Number sold in 6 months (962) /6 months = 160 </li></ul><ul><li>2. Homes on market (1047)/Absorption rate (160) = 6.5 Based on 6 months of sales, it would take an average of 6 months to sell the existing homes on the market in The Woodlands. </li></ul>
Six months inventory indicates a balanced market. Less than 6 is a sellers market and more than 6 is a buyers market. Normal Market - In a normal market there is a 6 month supply of homes where the number of listings about equals the number of buyers. DEFINITION OF MARKETS A NORMAL MARKET 6 months inventory
Seller's Market - In a seller's market there is less than 6 months supply of homes. This is in relation to “Supply and Demand”. Since there are fewer homes to choose from, sellers are more in control and buyers may have to be willing to pay top dollar to get the home that they want. In a seller’s market it is not uncommon to see multiple offers on a home. DEFINITION OF MARKETS A SELLERS MARKET < 6 months inventory
Buyer's Market - In a buyer's market there is more than 6 months supply of homes. Supply is great and buyers are more in control since there are so many more homes to choose from. It is not uncommon for sellers to offer incentives – such as contributing to the buyers closing cost – to attract buyers to their home. DEFINITION OF MARKETS A BUYERS MARKET > 6 months inventory
MARKET TRENDS Home prices in real estate are a matter of supply and demand as with 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 global To assess sales trends, you can also calculate numbers over shorter six- and three-month periods.
TRENDING – Compare by time periods Below is a TRENDING report for one are of Houston where the local economy has had a negative impact on housing prices. Months of Inventory based on: 12 months of sales – 8.8 months 6 months of sales – 8.5 months 3 months of sales – 11 months
TRENDING – Compare by time periods Here is another area of town where the local economy is more favorable. Months of Inventory based on: 12 months of sales – 6.5 months 6 months of sales – 6.5 months 3 months of sales – 7.3 months
TRENDING – Compare by other variables Months of Inventory can also be calculated with other variables: 1. Price ranges 2. One story vs two story 3. Features such as golf course lot, or pool
Call or email if you would like to know the Months of Inventory for your area.