Understanding The Housing Market
Are we in a Buyer’s, a Seller’s, or a Balanced Market?
If you are getting into the real estate market as a Buyer or a Seller, it is important to determine whether you find yourself in a buyer's market, a seller's market, or a market that is considered "balanced." Two indicators that we use to determine the answer to this question are the "Absorption Rate" and the "Monthly Inventory."
Generally speaking, if there are less than 3 months of inventory, it is considered a seller's market; if between 3-6 months of inventory, it is considered a balanced market; and, if more than 6 months of inventory, it is considered a buyer's market.
When you find yourself in a seller's market, a seller has the luxury of pricing their home at the top of the market and even beyond because they know that buyers do not have much of a selection. The seller's competitive advantage increases as the available inventory shrinks.
When you find yourself in a buyer’s market, a seller does not have the luxury of pricing their home at the top of the market. In this instance, a seller should price their home competitively because buyers have an abundance of options to choose from. If the inventory is increasing, the seller could find themselves "chasing the market" down with price reductions. As inventory increases, buyers have the decided advantage.
How do we calculate the Monthly Inventory and the Absorption Rate?
The Absorption Rate is calculated by dividing the total amount of available homes by the total number of home sales for the month.
The Monthly Inventory refers to how many months that it would take to sell all of the current homes, given the current absorption rate.