If you ever read much about real estate, chances are you might have heard the term monthly absorption rate or current monthly inventory. If you haven't heard those, I know you've heard Buyers' Market or Sellers' Market. I'm going to explain how they determine what type of market it is.
I think most people who listen to the news know that nationally (and I hate to do that because there really is no such thing as a national market), we are in a Buyers' Market. Sellers are having a harder time selling their homes than they have in years past.
While it is true nationally, let's figure out what our local market consists of. First off we have to gather some stats. We will need to know the following:
- How many homes have sold over the last twelve months (you can use any time period, but I use twelve months to get a good average) in a specific area.
- How many homes are currently active or sale pending in the same area.
Once we have our numbers we have to apply them to a formula. Now I have seen different people use slightly different formulas, but the results are usually pretty comparable. The formula I like to use came from Realtor Magazine which is a publication from the National Association of Realtors. It is calculated like this:
- Take the total number of homes sold divided by how many months you used for the time period. This will give you a monthly absorption rate.
- Once you have that number, divide it into the total number of homes currently active or sale pending. This will give you a month's supply of inventory.
An inventory of six months is considered to be a balanced market. Anything under six months is a Seller's market and anything over would be a Buyers' Market. Let's try a few local towns (note: These numbers are deemed to be reliable, but are in no way guaranteed).
- Jeffersonville, over the last year, has averaged about 54 homes sold per month.
- There are currently 487 homes that are active or sale pending.
- By dividing our 54 homes sold per month into our 487 homes currently active or pending, we determine that Jeffersonville currently has nine months of inventory.
- New Albany, over the last year, has averaged 50 homes sold per month.
- There are currently 611 homes that are active or sale pending.
- Again, dividing our 50 homes per month into our 611 homes currently active or pending and we determine that New Albany has about twelve months of inventory.
- Sellersburg is a rapidly growing area. Over the last year they have averaged 27 homes sold every month.
- There are currently 248 homes that are active or sale pending.
- Taking the 27 homes per month into the 248 current homes, we determine that Sellersburg has about nine months of inventory.
So you may have asked yourself by now what all this means. Well it could mean a lot of things. It means that buyers currently have a plethora of houses to choose from. It means that there is a lot of competition between sellers.
It also means that homes priced incorrectly have a severely small chance of ever selling. They will be lost in the shuffle and by the time the agents and sellers get it right, it could be too late.
Homes will sell in any market, but you have to pay attention to what is going on around you and adjust accordingly. Real estate is like a living, breathing thing. It changes daily and just because it was one thing one day, doesn't necessarily mean it will be the same the next.
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