If you have been following the real estate market over the past few years, then you likely are well aware of the persistently tight inventory of homes for sale. Needless to say, this tight inventory combined with strong buyer demand has resulted in dramatic home price growth for the past few years. Although the inventory of homes for sale remains relatively low from a historical perspective, it has been steadily improving over the year. In fact, the inventory of homes for sale in January 2022 was a record low at just 1.6 months. Fortunately for home buyers, the current inventory of homes for sale is just under 4 months. For perspective, a 5 to 6 month inventory of homes for sale is considered to be a balanced market and thus does not favor either buyers or sellers. As a result, we tend to see more of a moderate rate of home price appreciation.
What are absorption rates and months of inventory?
Absorption rates and months of inventory represent the liquidity of the real estate market. Typically, this analysis can be applied to various segments of the market. A segment can be further defined by price range or type of property. Whether you are a buyer or seller, this information for your desired segment of the market is very important. For sellers, this information can assist in determining the optimal price for a property. For buyers, this information may indicate the extent to which a seller may be willing to lower their asking price or make other concessions.
Absorption rate formula
Another way to think about absorption rate is to put it in more tangible terms such as “months of inventory”. In doing this, you take the number of active listings and divide it by the total number of sold transactions within the same month to give you the months of inventory.
To calculate the months of inventory for any given market:
- Find the total number of active listings on the market last month.
- Find the total number of sold transactions for the last month.
- Divide the number of active listings by the number of sales to determine the number of months of inventory remaining.
Summary
Whether you are a buyer or seller, it is important to be well versed in your local market. A big component of this local market involves being well aware of the absorption rate for your focused segment in the market. With the help from your local and knowledgeable real estate agent, you should be able to craft an appropriate approach to either buying or selling.
Are you in the South Florida market? No other real estate brokerage is as knowledgeable in this market as Live South Florida Realty, Inc. Whether you are buying or selling, be sure to contact Natasha at Live South Florida Realty, Inc. today! In addition, be sure to download are free and up-to-date Florida Home Search app for your mobile device.
