When it comes to buying or selling a home, it is important to have a reasonable understanding of market conditions. While buyers and sellers can certainly tap into the expertise of a Realtor in order to make the best decisions, those who have a good understanding of market conditions are far more likely to have a favorable buying or selling experience.
When it comes to understanding market conditions, there are three primary factors that need to be taken into consideration. These include:
- Buyers’ vs. sellers’ market
- Absorption rate
- Inventory
The first factor, whether it is a buyers’ or a sellers’ market, is relatively easy to understand. If it is a sellers’ market, homes sell quickly. As a result, they have more power when it comes to the prices they demand as well as the terms they negotiate with buyers. When it is a buyers’ market, on the other hand, homes sit on the market for longer than usual. In this situation, the buyer has the upper hand. Therefore, whether you are looking for a buyers’ market or a sellers’ market will depend upon which side of the transaction you are sitting.
The next factor involved in understanding market conditions, the absorption rate, isn’t quite so self-explanatory. In short, the absorption rate refers to how long it would take to sell the number of homes that are currently on the market. To calculate the absorption rate, you must first determine the average number of homes sold each month. Then, you must divide the number of homes on the market by this figure. As such, if 36 homes were sold in the area over the past three months, the average number of homes sold per month would be 12 (36 homes divided by 3 months equals 12 homes sold per month). If there are 72 homes on the market, the absorption rate is 6 months worth of inventory (72 homes on the market divided by 12 homes sold per month equals 6 months of inventory).
In general, if there are less than four months of inventory on the market, it is considered to be a sellers’ market. If there is more than seven months worth of inventory, it is a buyers’ market. Anything in between and the market is considered balanced. Obviously, the further the market is from having four to seven months of inventory, the more of a buyers’ or sellers’ market it is considered to be.
The final factor taken into consideration when understanding market conditions is the inventory. Once the absorption rate has been calculated, determining the inventory is a simple task. This is because the inventory is simply the number of homes currently on the market divided by the absorption rate. This figure, which is calculated in months, will give you a good idea of how long it will likely take for the property to sell. The longer a property is expected to sit on the market, the more of a buyers’ market it is considered to be.
About the Author:
Eric Bramlett is the broker & co-owner of One Source Realty, a boutique Austin real estate brokerage. Eric currently manages his agents, and works with select buyers & sellers. Eric manages a Austin condo website, and specializes in Steiner Ranch Homes for Sale. Eric has worked in central & west Austin for 7+ years, and is considered an expert in online marketing.
Great information Eric. A detail that probably falls in the market inventory category for sellers to consider is competition. Its important for a home seller to look closely at the competition to determine the appropriate list price and follow the market throughout the process.