“How’s the market?”
This is a question asked of Real Estate professionals all the time. Home sellers, home buyers and other agents are constantly gauging the health of their market place, because real estate is the ultimate local business. What is happening in one town can vary widely from a neighboring town.
There are many ways to gauge the health of a real estate market place: Average Sales Price, Number of Sales, List to Sales Price Ratio, Average Days on Market just to name a few.
One very good barometer of a real estate market’s health, which is less commonly cited in popular news media is a market’s absorption rate. Quite simply, the absorption rate looks at how many homes are for sale in a given market, and divides that by the average number of homes sold per month in that area to determine how many months of inventory are on the market. In other words, how many months would it take to sell all the homes currently on the market in a given location if no new listings came on the market?
Take for example the chart below, which breaks down the absorption rate of single-family homes in Essex County, NJ over the last six months:
Besides the fact that we see a wide divergence from town-to-town, what else can we see from this chart? Generally speaking, a 5-7 month supply of inventory is considered a balanced market – equal number of homes for sale and buyers. West Orange, Roseland, Livingston, Cedar Grove, Caldwell and Bloomfield all clock in as balanced marketplaces. Below five months of inventory and you have a seller’s market – great news if you own a home in South Orange and Nutley. And if you have a 3 month or less supply of housing in a given market – that’s a hyper-seller’s market, like we are currently seeing in West Caldwell, Montclair and Glen Ridge. In these towns, you are likely to see multiple offers on listings in just a few days on the market.
Not all Essex County housing markets are doing as well. Orange, Newark, Irvington and East Orange all have more than a year’s supply of housing currently on the market. These may be markets which a large number of short sales or foreclosures. These may also be towns where buyers have a lot of options and leverage when negotiating offers.
Absorption rates can be helpful when pricing your home or determining your offer price, but you should contact a real estate professional for a more accurate picture of a market’s health. There are exceptions to this guideline; for example, certain neighborhoods within towns get premium pricing, and not all homes in a given market are comparable. But absorption rates can be a valuable tool in your real estate pricing arsenal.