Precisely how does a buyer or seller know when a
real estate market most favors buyers or
sellers? No buyer wants to pay too much and no
seller wants to leave money on the table by
pricing too low. The answer is in knowing the
market absorption rates.
Property absorption
rates in any local real estate market are
usually considered the best indicators of
whether that market is a sellers’ market, a
buyers’ market, or a neutral market. The market
is the market and favors no one. But knowing the
current real estate market cycle is essential
for success as either a buyer or seller.
Sellers’ Market – Absorption Rates 1-4;
Neutral Market – Absorption Rates 5-6;
Buyers’ Market – Absorption Rates greater than 7
The easy-to-understand process of calculating
absorption rates for local markets will be
helpful to anyone trying to figure out the
current real estate cycle and how to formulate a
winning buying or selling strategy.
For instance, assume there are currently 100
Single Family Home Lots for sale in a large,
single family home community. Of these, 70 are
priced at, or below, $45,000. Last month, assume
that 5 lots sold for $45,000 or less. The
absorption rate would then be 70 divided by 5 ,
or 14.0. An absorption rate of 14.0 indicates a
strong buyer's market and, that in an unchanged
market, it will take 14 months to sell all the
hypothetical 70 existing lots listed at or below
$45,000.
This basic analysis can be used with most of
property types including building lots, homes,
condominiums, or even commercial properties.
There must, however, be a high enough number of
actual transactions to permit statistical
analysis. The fewer the actual number of
transactions the less statistically significant
will be the results. Also, remember that within
very broad but weak markets, narrow market
segments may be showing non-typical strength.
Market absorption is a very useful tool for
anyone trying to best determine how to price
their property and what the current market says
is a reasonable time period for a sale to be
concluded. The absorption rate analysis also
helps buyers in that in a buyer's market a low
purchase offer is often a winning strategy.
