Is This a Buyer’s Market or a Seller’s Market?
You have probably heard the terms Buyer’s Market and Seller’s Market thrown around when you read or hear someone talk about Florida real estate. We all have ideas of what it means to be in either of these types of markets. Logic would dictate that a buyer’s market is one that is favorable for a buyer, and a seller’s market is one that is favorable for sellers…which is all true. The question is; how is it determined what type of market we are really in? Is there a real and tangible way to determine the health of a real estate market?
Yeah the market is great! I think?! Somebody said it was…
Many real estate agents will use anecdotal information when they are asked about the current state of the real estate market. They may form an opinion of how the market is performing based off how many sales they have in their pipeline in any particular time. Maybe they ask around the office to see how other agents are doing and use that discussion as their reference point. Maybe the agent read something in the newspaper about the market with a headline stating that the market is a boom or a bust. None of these are truly great ways to measure the health of the local real estate market unfortunately. They may have some use as an indicator but they are not true empirical measurements.
I know a guy…
In the past I employed several unique methods to gain insight into the real estate market. In addition to my expertise as a real estate brokerage owner and seeing all the transactions my agents were doing, I used to ask my local home inspector how busy he was in order to better gauge the market. I would also interview my local mortgage broker as they are directly involved in property transfers and are dealing with many different agents and brokerages outside of my sphere. Title companies can also be a gauge of the market based on the number of closings they are doing…but all of this is just speculation and not accurate. While it may be fun to employ these methods they still are quite subjective and not of much use. The only way to truly judge whether it’s a buyer or seller market is to look at hard facts and numbers directly from the MLS system and use a calculation called the Absorption Rate.
Absorption Rate for the win!
The Absorption Rate is a calculation that will quickly determine whether it is currently a buyer's or seller’s market. The absorption rate calculates how many homes are currently on the market versus how many have sold in a given period of time. Its result is calculated as how many months it would take to sell out the current inventory if no new listings came onto the market. So if the absorption rate is 3 months, that would indicate that theoretically if no new listings come onto the market the current inventory would be completely depleted in that 3 months.
Absorption rates can be calculated by any time period you choose, usually 30, 60, 90, or 180 days. In markets where there is a lot of turnover, the shortest time period would give the best indicator of the current market. If you are looking at a smaller data set, like a small subdivision, it might make more sense to calculate it by 6 months or even a year in some instances.
Here is how the calculation works:
- Find the current number of properties for sale. (actives)
- Find the current number sold properties in your desired time period. (solds)
- Divide the days in your selected time period by the solds. Take that number and multiply by the number of active properties for sale.
- You will get a number representing how many days it would take to sell out the current inventory.
If the number of months is under 5, this is considered a seller’s market as there is not a lot of inventory to choose from and property is selling fast. From 5-7 months is considered a balanced market. Anything over 7 months is considered a buyer’s market as there are many properties on the market, they are taking a long time to sell and the buyers now have the power.
So show me the calculation!
Let’s do a hypothetical calculation. Let’s say you are looking at single family homes in Sarasota County Florida. You want to know the current absorption rate based off sales in the last month. You know that there are 2000 properties for sale and you know that 1000 sold in the last 30 days.
30 days divided by 1000 solds = .03 rate of home sales
.03 x 2000 actives = 60 days
An absorption rate of 60 days would indicate a strong buyer’s market. See that was easy! The hardest part is obtaining an accurate data set. That is where your PROGRAM Realty agent comes in. Although many agents will not know how to calculate absorption rate, the professionals at PROGRAM Realty do. Feel free to contact us for the latest numbers that will be custom based of the property types and locations you are looking to purchase or sell in.
*UPDATE - We just ran the calculations for Single Family home sales during December 2018 and the results are in. Our Absorption Rate analysis for Charlotte and Sarasota County puts us at 5.5 months of inventory. This would indicate we are in a Balanced Market.
Please remember if you have any questions about the market, and would to hear facts as opposed to conjecture, just give The Jason Painter Group at PROGRAM Realty a call! We would love to hear from you!