Using the absorption rate to determine the months of inventory

   Last week I wrote about the general stability of real estate values that we are seeing in Archuleta county. I also mentioned that although home and land prices are remaining very strong, the rate at which they are selling has significantly decreased. After the publication of that article I had a few conversations in which I was asked about the rate of sales, and what that really means for us in real estate. I decided to address that topic here on my blog.

   One of the measurements frequently used to understand liquidity of inventory is known as the absorption rate. This is basically the rate in which a specific sector (usually price range) of the market sells in a given time frame. An easy way to understand this is to look at it in one month increments. For example- If we were looking at home sales between 100,000 and 200,000 and we found that 60 homes have sold in 2006, this would be an absorption rate of 5 per month. (60/12 = 5) This number does us little good unless we put it in more tangible terms. When we take the number of current active listings and divide it by the absorption rate we can determine how many months of inventory we have. For our example above if we have 39 active listings then we have a 7 month inventory.

   As a general rule 6 months supply  of inventory is a balanced market. More than that and we are considered to be in a buyer’s market, less and we are in a seller’s market.

   As I mentioned last week we are in a buyer’s market right now which up until this point has not affected our sale prices, but has affected our months of inventory. Simply put, It will take a lot longer for you to sell your home if all factors remain equal.

I have compiled the charts below from the numbers found in the CREN MLS system from Nov 1st 2006-2007.

Listed below are the current months of inventory for residential listings in Archuleta County.

RESIDENTIAL MONTHS OF INVENTORY

Here are the current months of inventory for vacant land in Archuleta County.

VACANT LAND MONTHS OF INVENTORY

 

   The first two questions I get asked when preparing to list  property is 1- “How much is it worth?” and 2- “How long will it take me to sell?” Once I determine how much a home or property “should” sell for I always go to the numbers found through absorption rates and months of inventory. Then  I encourage my seller’s to determine their list price by deciding how long they are willing to wait to statistically be able to sell their property.

   If you currently have your home or property on the market and are unsure about the price in which it is listed, ask your REALTOR® about the months of inventory for your price range. If you are not currently working with a REALTOR® give me a call and I will be happy to discuss the pricing of your property with you.

 

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2 thoughts on “Using the absorption rate to determine the months of inventory

  1. Very clever idea to do this! There should be a program that analyzes all the data to come up with the same kind of conclusions you did!

  2. A very good summary. In some markets however, a balanced supply can range from 4 to 6 months of investory. This is especially true in micro-markets where there is more rapid growth and new construction turnover is high.

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