DETERMINING A BUYERS OR SELLERS OR BALANCED REAL ESTATE MARKET
KNOWN AS ABSORPTION RATE = MONTHS SUPPLY OF INVENTORY-MSI
A months supply of inventory (homes for sale) helps determine a Buyer’s, Balanced or Seller’s Market. MSI is an estimate of how long it will take for all the market’s homes to be sold, or absorbed, based on home many homes are currently on the market and the rate homes in the past (absorption rate).
ABSORPTION RATES- Total of homes sold in the last year divided by the months in a year, twelve. Therefore take the amount of current inventory, take the number of homes sold in the past year divided by 12. Absorption rate is the percentage the 12 month average sale is to the total current listings, showing the absorption percentage of the inventory.
I.E. Let’s say 341 homes sold over the last 12 months, 341 divided by 12 = 28.4 homes sold per month. With a current active inventory of say 476 homes so 28.4 % of 476 is 5.97% of the inventory, so the absorption rate would be 5.87% of the inventory per month.
So how long will it take to sell 476 homes? By dividing the number 476 homes by 28.4 =…it will take 16.76 months to sell all of the homes = a buyer’s market. This is the month’s supply of inventory (MSI)
MSI is used to compare the size of the inventory to the rate of sale.
MSI is an indicator of how balanced a market is.
MSI less than 5 months = seller’s market
MSI equals 5-7 months = balanced market
MSI greater than 7 months = buyer’s market -sellers will need to be more serious with price reductions if they want to sell soon and be willing to be more negotiable with a buyer.
Check the MSI for each neighborhood, not just the city to help with pricing in a neighborhood.
Find the sales from last 12 months divide by 12 then find what percentage this is of the current inventory to determine the absorption rate of the inventory per month.
For Sellers, these stats will tell you how much competition you have.
For Buyers MSI will tell you how negotiable sellers maybe in different markets
MSI and absorption rates help you make better real estate decisions in the future. Don’t put too much weight into real estate statistics, but do not ignore them!
DETERMINING A BUYERS OR SELLERS OR BALANCED REAL ESTATE MARKET
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