These two terms are one piece of the puzzle to help real estate agents, appraisers, home sellers and buyers alike make sense out of the real estate market.
This is a little-known, but effective tool, if used in proper context, to help a home seller or buyer understand the market conditions for the home they wish to sell or buy.
The easiest way to define these two terms is with an example:
Absorption Rates (AR)- The rate at which homes are selling (ie. absorbed), over a specific time period, typically 12 months. This is beneficial in determining supply and demand trends for the local market.
Months Housing Supply (MHS) - How long it will take, in number of months, for all the current homes for sale to be sold.
Formulas:
Monthly Absorption Rate = # of homes sold in the past twelve months / 12 Months.
Months Housing Supply = # of currently active homes for sale / Monthly Absorption Rate
Reference Guideline:
# Months to Sell Type of Market
1-4 Sellers
5-6 Balanced
7+ Buyers
Note: Six (6) months of inventory is considered a balanced market.
As is true with everything statistical, one has to really know when to apply this tool, under what circumstances is it relevant, and what are the constraints, as with everything in real estate, no individual property fits neatly into a box (no pun intended) or equation.
Here are a few examples of a few constraints:
- Seasonal fluctuations - If more homes sell in the spring and summer months, what should the sampling period be?
- Expired Listings - How should listings that have expired and been re-listed be treated?
- Selecting Active and Sold Homes - What homes should be selected? What criteria should be used?
- Selecting the AR Time Period - Is 3 months enough? 6? 12?
- Is there a negative or positive trend underway? How do you compensate for the trend?
- Since these are median #s, how does my home relate?
- What can I do to make my home defy the median?
- Do watershed events (say...the October 2008 Economic/Credit/Housing meltdown) affect: time periods? the statistics themselves, the subset of homes selected, etc.?
- Is new construction affecting the supply or demand of nearby properties?
A question that sellers typically raise after reviewing this information:
Does this mean my home will take 9-18 months (Median MHS) to sell? While there is no easy answer here, the answer is: It depends. Many factors go into how quickly or long a home will sell. See my post titled "Your home is worth whatever a buyer is willing to pay for it" which talks about the many factors to consider when selling a home. We sell homes that defy the median, and are at the low end of the statistics when sellers listen to our advice and adopt our home preparation, staging and pricing considerations. While nothing is guaranteed, it's all about maximizing your opportunities relative to your competition and constraints.
Using a concrete example below, taken from the Northeast Ohio MLS, this report was run for the City of Strongsville, all single-family homes, so to see what is happening in the community as a whole:
Source: NEOHREX. Information deemed reliable but is not guaranteed.
A couple of observations from looking at the above table:
- The MHS is higher than a balanced market, so the current market (and true as well over the past year) favors buyers and is progressively favoring buyers as time goes on..
- Sales are flat in the 1st quarter of 2009 over the 4th quarter of 2008, but down significantly compared to the 4/30/08 - 10/26/08. Some of this reduction may be due to season fluctuations, but time will tell.
Note: This is an example at a community level. The selection criteria would be customized to be relevant for a given property so as to make the data more meaningful.
Note: As of 4/1/09, Fannie Mae is requiring appraisers to compile the information you see above to be used as a part of a Market Conditions Addendum for appraisals.
Olsen Ziegler Realty -- A Smarter Way to buy and sell your Greater Cleveland, Ohio Home
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