Sometimes it's an extreme seller's market, then we slide into a buyer's market, and somewhere in the middle is a balanced real estate market. It's so important for the agents to understand it, so they can then explain things to a consumer. Here is my guide to both, agents & consumers, about how to understand the real estate market - no matter what it's doing.
Supply & Demand
This is the primary thing to understand about real estate markets. They are always built on supply and demand. Different things drive the supply such as builders creating more homes to choose from, sellers deciding to sell for various reasons, economic outlooks, and seasonality. All of these contribute to the supply side of the equation. As for demand, there are plenty of drivers of this too. Things like affordability, interest rates, jobs market numbers, economic outlooks, and again seasonality.
If we have too much demand, and not enough supply - the market will become a seller's market and home prices will be able to increase. This is great for home sellers as they can get top dollar for their home. However, when the prices get too high, and the other economic factors become an issue, this leads to housing affordability being a concern.
If we have plenty of supply, and not enough demand - the market shifts to a buyer's market. Home prices must decrease in order for buyers to be willing or able to take advantage of purchasing a home. Sometimes the demand is low because interest rates are high. Other times, demand is low because the home prices are too high. Either way - when buyers don't feel comfortable with the house payments, they decide to stay where they are (renting, living with family/friends, or maybe even just not selling to make a move).
Months of Supply
Sometimes you will hear someone talk about the "inventory" of homes available. Inventory just means all the listings currently for sale in the market area. If someone mentions the "months supply" of houses, they may be measuring if it's a buyer or seller market. The concept is simple....If no other homes hit the market in a specific area, how long (how many months) would it take to sell all of the existing listings. Since the answer is calculated in months - it's called "months supply" of homes. A balanced real estate market typically has 4-6 months of inventory. When we have a lower month's supply of homes, we are in a seller's market (lower supply). Typically anything at 4-months or less is a seller's market. Conversely, when you have 6 or more months of inventory (high supply) it's considered a buyer's market because there isn't enough demand from buyers to purchase the properties available.
Formula: Total Number of Properties for Sale DIVIDED BY Total Number of Properties Sold in the Previous Month.
Absorption Rate
This is similar to Months Supply of housing. When looking at the Absorption Rate, we generally consider the past 12-months of sales. This gives a broader overview and a longer-term perspective on the market. The Absorption Rate measures how quickly properties are sold and is usually viewed as a percentage of total listings sold per year. A high absorption rate signifies a seller's market with high demand, while a low absorption rate indicates a buyer's market with lower demand. An Absorption Rate above 20% is considered to be a seller’s market, and 15% or less is considered a buyer’s market. A balanced market would be anywhere between 15-20%.
Formula: Number of Units Sold DIVIDED BY Total Number of Units on the Market MULTIPLIED BY 100.
Example: If 120 homes sold out of 380 on the market last year, the absorption rate is 31.5% (120/380 x 100).
Pricing Strategies
It’s so important for a consumer to really spend time working with their agent on pricing BEFORE they hit the market. The agent can provide comparable sales data, pricing trends, and absorption rate or months supply of inventory. All of these things, along with the location, quality, and condition of the home should be considered.
In a buyer’s market, overpricing your home from the start makes it hard to catch back up with the market. Being careful and thoughtful (and not too emotional) in deciding a listing price is key. If you don’t price it right, you will likely end up “chasing” the market by making price adjustments too little or too late (or both), which causes your property to sit on the market longer.
In a seller’s market, you may have the ability to “push” the market and list slightly higher than the past comparable sales because the market is trending up. This keeps you competitive, while still getting the highest return on your investment.
I hope that all of this information is helpful to you as you consider making your next move. If you are in the North Texas area, our agents would love to help you with your next real estate purchase or sale. If you are outside of our service area, reach out to me anyway. I have met so many amazing agents in my real estate travels. I will be happy to connect you with a great agent anywhere in the US. It’s important to hire an agent who truly understands the market and how it shifts.