Determining the market supply is an important factor in helping to determine how to price your home for sale or what to offer on a home you are buying. We determine the supply of inventory (homes available for sale) by figuring out the housing market absorption rate.
What is an Absorption Rate?
The absorption rate tells us how many months of supply of homes there is in the market. We can calculate a broad absorption rate for an entire market or for a specific neighborhood. We could drill it down even further and figure out the absorption rate for a particular type of house – say 3 bedrooms, 2 bathrooms in the Lakewood area of Dallas, Texas for example. What is important in calculating the absorption rate is the strength of the data. Data that is inaccurate will give you skewed results.
Why is an Absorption Rate Important?
The reason the absorption rate is important is because it tells us what type of market we have – a seller’s market, a buyer’s market, or equilibrium. Knowing the type of market aides us in pricing a home, understanding how to effectively negotiate for that home and recognizing how best to approach a purchase or sale of property. Equilibrium occurs when there is a 6 month supply of homes on the market. That is to say that the homes that are listed will turnover every 6 months. A seller’s market occurs when there is less than a 6 month supply and a buyer’s market occurs when there is more than a 6 month supply of homes on the market. This lets buyers, sellers and agents better understand market dynamics. If we are in a seller’s market, typically homes sell for close to, or over asking price. Multiple offers are not uncommon and the seller’s bargaining position is stronger than the buyer’s. In a buyer’s market, the roles are reversed. Buyer’s typically have a stronger bargaining position and homes typically sell below asking price and with greater seller concessions.
Do you have a question about absorption rates or the market? Give us a call at 214-810-2016 and Chris Herron or Elisabeth Silvaggio would be happy to answer your questions. Or send us a note online
See our Market Update information