Four of the key considerations for both buyers and sellers are:
1. Supply – The number of homes listed for sale
2. Demand – The number of homes that have sold
3. Consumption – The absorption rate or month’s supply of homes available for sale
4. Value – The average price or price per square foot of properties that have sold
An understanding of each of the above indicators is critical to a Trusted Real Estate Advisor’s ability to give good advice to their clients. The Consumption Rate above is one of the most important indicators because it can help both buyers and sellers determine both the type of market that exists now, and the likelihood of price adjustments up or down in the future.
Consider the following:
– Under normal market conditions, the average month’s supply of inventory is around 5-6 months, nationally.
– If there is more than a 6 month’s supply of inventory, the market is said to favor Buyers.
– If there is less than a 5 month supply of homes for sale, the market is said to favor Sellers.
– If the inventory level is declining, this is usually a great sign for Sellers, but it is important to point out to your Sellers that inventory levels are still excessive, if there is more than a 6 month supply of homes for sale.
– If inventory levels remain stubbornly high, it’s important to point out to sellers that it could take years for the market to return to normal. It’s also important to let your sellers know that foreclosures and Pent-Up Seller Demand could keep inventory levels high for quite some time.
– If inventory levels are declining, it’s extremely important to let your buyers know that:
– Prices are likely to increase, especially if the month’s supply of homes is near the normal 6 month level.
– The selection of inventory will likely decline, especially considering that the best properties tend to sell first, which could lead to your buyers having to choose from “left-overs”.
Keep in mind that the value or price of a home is most sensitive to the absorption rate. And, that the absorption rate is a culmination of what is happening with both inventory levels (Supply) and sales (Demand). As outlined above, Absorption Rate is usually a very reliable indicator of future price movement.
Best of all, if as an agent you are extremely familiar with the year-over-year change in absorption rate, you will be distinguishing yourself from all of the agents that aren’t able to offer the same kind of sophisticated analysis of market trends.