As we head into the heart of the real estate selling season I thought it would be interesting to look at market conditions from a new angle. In the past I've looked closely at the foreclosure and short sale markets as well as specific areas and neighborhoods like Cabezon, Four Hills and Corrales. Today, however, I spent time looking at current absorption rates to see how the market looks from that perspective in each individual MLS area for the city of Albuquerque. But before I get to that let's talk about what absorption rate is and why it matters.
What is Absorption Rate?
Absorption rate is a real estate stat that can be used to understand current market conditions. Measured in months, the absorption rate is one of the most current and accurate assessments of what the real market conditions are.
Based on the relationship between total homes for sale and total homes sold, it does a better job
of measuring the market because it demonstrates the all important balance between those two important numbers.
It's not difficult to calculate what the absorption rate is. It's a very simple equation. Homes for sale/homes sold.
Here's a simple example using nice round numbers. Let's say 100 homes are for sale in an area. Now let's say that 10 homes sold in that same area the previous month. 100 divided by 10 equals 10. That's 10 months worth of inventory. Absorption rate is a theoretical number which for the purpose of analyzing a market assumes that all 100 of those homes have to sell before any new homes come on the market. While that is an unrealistic scenario, the months of inventory number it produces is very helpful to both home buyers and home sellers. We'll talk more about that later on.
What is a Balanced Market?
In a balanced market, there are enough homes to go around without there being a surplus. If sellers price their homes realistically it's relatively easy for them to sell, and buyer's should be able to find homes to buy without getting into bidding wars. The national association of Realtors points to the absorption rate when it says that 6 months of home inventory is a balanced market. When the absorption rate falls below 6 months, there's a shortage of homes and it's said to be a sellers market. The sellers have the upper hand and can ask more for their homes becuase prices are on the way up. When the absorption rate grows higher than 6 months, there's a surplus of homes. Buyers have the upper hand having more homes to choose from and declining home prices.
Market Balance in the Recent Past?
Back in 2011, the absorption rate was very high. Home sales were down which caused the higher absorption rate, but also contributed to increasing levels of homes for sale, which made the rate get higher yet. The absorption rate was near the ten month range in May 2011 and it was an incredible buyer's market.
All that began to change towards the end of 2011 when two things happened - a normal seasonal decline in active listings and an abnormal increase in the number of homes sold in the fall. November of 2011 was the first time the rate dropped below 8 months.
As you can see looking at the chart above, the absorption rate has continued moving downward eah year since 2011, reflecting the market recovery. You'll also note that each year has a particular shape demonstrating that absorption rate peaks in June and July, and is actually lower in March, April and May, as well as October, November and December.
Why Does Absorption Rate Matter?
It's pretty simple economics. As supply is reduced relative to demand, prices go up. In fact we've been seeing slowly rising prices over the last year as the absorption rate moved toward a more normal 6 months.
Savvy buyers and sellers should understand this information as they consider when to buy or sell. For instance, someone wishing to list their home for sale should realize that listing in the spring is a good strategy, since inventory levels are relatively low relative to demand. A quick glance at the graph above shows what happens to the balance of inventory as home owners who missed the peak of the selling season (which to the surprise of many comes earlier in the season than most expect) find more competition over the slower summer months.
Home buyers can also look at the absorption rate and see that competition for homes is lower during the summer months of June and July, after the spring rush when the market hits a bit of a lull. Some years this may not have as great as an affect as it will in other years, but in the coming years when buyers may again see a return to the market condition similar to the peak years of 2004-2007, these may be the months when fewer mulitple offers are received on the most desirable properties.
Timing the Market is Tricky - Act When the Time is Right For You
While the extreme peak and valley years dominate news headlines, savvy Realtors understand that the real estate market is changing all the time. There is a natural ebb and flow to the market every year, although occasionally abrupt changes in the market climate can happen unexpectedly.
Please keep in mind that real estate is not an academic exercise, and in fact the decision to buy or sell is often triggered by life events which cannot be timed. If you find yourself needing to buy or sell at the wrong time of the year, you can use the absorption rate to help yourself understand the current market climate so you can make an informed decision about the pricing of your Albuquerque home.