Buyers and Sellers all pretty much ask the same questions. So it's not really to difficult for real estate agents that are active in the market to answer their clients questions. But there is one question most realtors struggle a little with. And yet, it is one of the most important things the agent must know to help their buyer make their best offer or to make sure their seller sets a list price that will get them the highest price in the shortest time.

The question asked is, Are we in a Buyers or a Sellers Market?

Absorption Rate - The Law of Supply & Demand Sets Home Values

I remember a lot of discussion in economics classes about whether we should make guns or butter. But, the most important thing I learned was that Supply and Demand sets values. Nothing has a set value, not even gold. When there is more gold available for sale than buyers are interested in - the price goes down. And when the amount of gold available for sale is scarce  - the price goes up. It's that simple.

The same is true for Real Estate. So when buyers and sellers ask a realtor if we are in a buyers or a sellers market, the realtor had better know the ration of homes sold last month to the number of listings currently on the market. It is a simple calculation any real estate agent can make after spending a few minutes on the Multiple listing service.

Trend Analysis Shows Real Estate Market Direction

Knowing the current Home Absorption Rate is great but it is not enough. To really nail the market rather than chase behind it you must know the trend. With simple trend analysis you will see patterns in absorption rates and see not only where it has come from but where it is going. The generally accepted ranges for a sellers and a buyers market are:

Sellers Market: 1 to 4 months

Neutral or Balanced Market: 5 to 6 months

Buyers Market: 7 months and above 

Absorption Rates by Market Segment

If your realtor gives you an absorption rate for the entire county, ask them to dig a little deeper. Better yet, look for another realtor who knows our market. It will save you a lot of money.

A county wide absorption rate is good as a benchmark for each municipality within the county and for an overall feel for the regional market. But it should not be used to set a listing price for a home or make an offer to buy. To really understand a market segment, like a city, or a neighborhood, you need to calculate the absorption rate for that specific market segment. I prefer to measure down to the city level. It gives a very accurate feeling for the home selling supply and demand for each city.

How to calculate Absorption Rate

Absorption Rate simply means the amount if time it will take to sell all the homes currently listed. It can be measured in terms of days, weeks, months, quarters, or even years. But most commonly it is measured in terms of months. The calculation is simple and best described by Krystal Kraft, an excellent Denver Colorado agent.

Use Absorption Rate To Your Advantage

Absorption rate is a very powerful tool that should be used in residential real estate for setting listing prices and determining how much to offer for a home. It is even more powerful in selling and purchasing investment properties and in land development. But that is the topic for a future post.

For additional reading on Absorption Rates check out these blog posts:

Rich Schiffer: Absorption Rate: What it is, and why you should use it 

George Tallabas: Absorption Rate>>A Must Add To Every CMA 

Jerry Rossi: Absorption Rate Analysis for Resale Clients

Joe Peffer: Absorption Rate OR How long will my house be on the market?