Virtually every Austin home buyer and home seller wants to know where the Austin real estate market is going. That’s a very sensible question when we consider that we can do nothing about the past and only the future is pertinent to our lives. Sales data in our Austin Real Estate Price Reports tell the story of where the market was, whereas absorption rate tells us where the Austin real estate market is heading.
Absorption Rate Quantifies the Direction of the Real Estate Market
Since real estate markets are always changing, it’s useful to have a grasp of how long it will take to absorb the existing inventory. Absorption rate provides a quantifiable snapshot to measure a fluid, constantly changing market and thereby assessing a possible trend. The assumption is that measuring the changes in the absorption rate can help infer a trend in the direction of home values.
What is Absorption Rate?
The absorption rate is the period of time it will take to sell the existing supply of housing inventory based on the number of homes sold during a given timeframe, assuming no additional homes are placed on the market.
- (# Sold Homes in Past 12 Months) / 12 = Absorption Rate
- Absorption Rate / (# Homes Currently for Sale) = # of Months to Sell Existing Inventory
Here’s an example:
- First, determine the number of sold homes in the past 12 month period. Let’s say 150 homes sold.
- Next, divide the total number of home sold 150 by 12. Answer: 12.5. The resulting number is called absorption rate.
- Lastly, divide the 12.5 rate into the number of homes for sale. Remember to keep it consistent. Let’s say there are 45 homes listed for sale. So, 45/12.5=3.60. This means it will take 3.6 months to sell off the existing inventory or one-half the homes will be sold in less than 2-months.
What Does Absorption Rate Mean to a Seller or Buyer?
Economists often speak in terms of “seller’s market” and “buyer’s market.” In layman’s terms a “seller’s market” is one in which the market forces favor the seller. Homes are in short supply, buyers are numerous, interest rates are low, and mortgage money is available. In a “buyer’s market,” there are an abundance of homes for sale, buyers are scarce, interest rates are high and money is tight and only available to the most creditworthy buyers. Absorption rate provides a number to help us characterize the condition of the market.
How Does Absorption Rate Determine a Sellers or Buyers Market?
Typically, real estate market analysts agree that a:
- Sellers Market exists when 1 to 4 months supply of homes is available
- Neutral Market exists when 5 to 6 months supply of homes is available
- Buyers Market exists when more than 6 months supply of homes is available
What Does a Sellers Market Mean to Buyers and Sellers?
In a sellers market, a seller can price the home more aggressively, do minimal staging and fewer repairs since homes are in short supply and buyers are plentiful. Buyers, on the other side, can expect serious competition over the limited supply of homes, multiple offers, over-bids and a market place working against them.
What Does a Neutral Market Mean to Buyers and Sellers?
In a neutral market, the seller must carefully read the competition to determine to what extent staging, repair and updating is necessary to be competitive. Here we have a much more level playing field. Buyers must recognize that while they are not the power player here, neither is the seller.
What Does a Buyers Market Mean to Buyers and Sellers?
In a buyers market the seller will need to recognize price is the key factor. Attractively low pricing, regardless of how much the property may have been worth in years gone by, is critical. Offering buyer incentives, such as, paying the buyer’s closing costs and home warranties may be necessary to make a deal. Staging and updating will be critical to make the home stand out against the competition and perform high levels of staging and updating. Buyers have much more leverage depending on the depths of a “buyer’s market.” While buyers can negotiate more assertively and ask for concessions that normally would not be agreeable, they run the risk of insulting a seller and destroying an otherwise viable transaction by pushing too hard.
Absorption Rate is Important to Buyers and Sellers
Whether you are a buyer or seller, knowing the absorption rate will assist you with determining real estate values for your market. The best Austin Realtors will discuss absorption rate with their seller and buyer clients as it benefits both to understand where the market is headed.
Looking for an Austin Realtor Who Understands the Real Estate Market?
Whether you’re looking to buy a home in Austin or sell a home in Austin, our team can help you interpret the market and come up with a game plan to keep the most number of dollars on your side of the table. Check out our Austin Home Buyer Program and our Austin Home Seller Program to learn how we’re different than you’re average Austin Realtor. Then, call us at (512) 827-8323 or email us at info@11OaksRealty.com to schedule a no obligation consultation.