The familiar law of supply and demand dictates values in all goods and services. Low supply and high demand leads to increasing prices, and high supply and low demand leads to decreasing prices. While this familiar concept is widely understood from stock prices to the price of a gallon of milk at the grocery store, it is rarely understood in the real estate market. We analyze supply and demand in real estate based on months of inventory or absorption rates. Both of these methods use the same data and are sometimes used interchangeably.
Months of Inventory
Months of Inventory is by taking the number of properties for sale (supply) divided by the number of properties sold over a given period of time (demand). This gives us the number of months it would take for the market to sell at the current inventory.
4-6 months of inventory is considered a neutral, or balanced market. Property values in a balanced market will remain fairly flat and generally appreciate at about the rate of inflation.
Less than 4 months of inventory is considered a seller’s market. In a seller’s market, there is a low supply of homes available relative to the demand and buyers will compete for the limited available inventory. With less than 3 months of inventory, sellers are able to be more aggressive with their pricing and will have a competitive advantage in negotiations. This gives sellers an advantage and can increase the price of homes in the area.
More than 6 months of inventory is considered a buyer’s market. In a buyer’s market, there is a high supply of homes available relative to the number of properties available. With more than 6 months of inventory, sellers will compete for buyers, which leads to downward pressure on prices.
Absorption Rates
Another way to look at supply and demand is through absorption rates. Absorption rates are the inverse of months of inventory and represent how much of the inventory (as a percentage) is being absorbed (sold) each month. Absorption rates are presented as a percentage of the current inventory.
An absorption rate of 17-33% is considered a neutral, or balanced market, more than 33% is considered a seller’s market, and an absorption rate of less than 17% is considered a buyer’s market.
Using absorption rates, we can find out the odds of selling in your specific neighborhood. Your odds of selling is a percentage of how likely your home will receive an offer over a period of time. This is important because it tells you how to position your home to get your desired result. You can increase your odds by adjusting the condition and/or price of your property.
Odds of Selling
Only a certain number of houses will sell in any market in any given period of time. To make sure that your home is one of them, we will provide you with all the information you’ll need to position your property to sell in the time you have allotted. When the stakes are high, you won’t want to guess. You’ll want to make an informed decision about how to position your home in the market.
Your odds of selling will show you how likely your home will receive an offer in a given time frame.
Odds of Selling is the sales rate in the time frame you’ve allotted divided by the number of properties for sale. Given the market fluctuations, it is recommended to calculate your odds of selling on a monthly basis so you know your odds of selling in the next 30 days.
Below is an example of how odds of selling can be applied to a real-life situation. Your Ruhl&Ruhl Realtor can explain how this applies to you and how to improve your odds:
If 24 comparable homes sold in the last 12 months, they are selling at a rate of 2 per month.
- 24 months / 12 months = 2 per month
If there are 13 houses comparable to yours on the market, plus your 1 home, selling at a rate of 2 per month, it will take 7 months to sell all the comparable homes.
- 14 active homes/ 2 per month = 7 months
For your home to sell (receive an offer) in the next month when it takes 7 months to sell all comparable homes, your odds of selling are 14%.
- 1 month / 7 months = 14%
Please note that each month, the odds of selling will adjust based on the market, and will need to be revisited regularly. We will work together to determine your exact odds of selling to help position your home in the current market to meet your goals.
Contact us to be put in touch with a local Ruhl&Ruhl Realtor to help you figure out your current market so you can be in the best position to sell your home for the most amount of money in your desired time frame.
