The Town Broker

Real Estate Statistics: What You Need To Understand. (Part 1)

Real estate statistics can be confusing. I once had a college professor who said that there were three kinds of lies: lies, damned lies, and statistics. (Actually, I think he stole this quote from Mark Twain. But the concept stuck with me, so I’ll give him credit.)  The phrase describes the idea that numbers can be used very persuasively in supporting an argument (especially a weak one). It also points out that people are often quick to disparage statistics that don’t support their point of view. 

Know The Key Real Estate Statistics To Achieve Success

Real estate is FULL of statistics! In this 3-part series, I’ll take a deeper look at the ones that I believe convey the most important information about any housing market: 1) market absorption, 2) days on market (DOM), and 3) sale price to original list price ratio.

Market Absorption

The market absorption rate is a statistic that describes the “dynamics” of the current market. If we can agree that all markets seek to find a balance between supply and demand, then the absorption rate tells us just how well it’s doing. The number is found by dividing the total number of available listings (those that are fully available to be shown and purchased) by the number of listings that have gone under contract in the past month. The answer to this simple math problem tells you just how many months it would take for all the available listings to be sold at the current pace of sales.

Ex.) In the graphic above: If there are 100 available listings currently on the market, and 4 have gone under contract in the past 30 days, then it would take 25 months (100/4) for everything to be sold (assuming of course that sales continued at the same pace, and that nothing new came on the market). But why is this number so important?

What history has shown is that a normal and “balanced market” is one with about 6 months of absorption. Home prices generally appreciate modestly under these conditions. When the number is lower it implies a stronger seller’s market, where demand is greater than the existing supply. In this kind of market, prices typically go up (sometimes irrationally). When the number is higher, it implies a stronger buyer’s market, where supply is greater than the current demand. In this scenario, prices often stagnate, or come down. We have seen this happen dramatically in recent years.

Looking at it from a different perspective…if there is a 10-month absorption rate, then it means that for every 10 homes currently on the market, there will likely be only 1 buyer over the next 30 days. Think about what that means for how a seller should position their home in the market, or the amount of leverage a buyer has in negotiating an offer.

It’s critical to understand that within any town, there are often several different markets which can have very different absorption rates. The condo market could look very different statistically than the single family home market. Similarly, the entry level price point in town could indicate a seller’s market (below 6-months absorption) while the luxury price point shows a strong buyer’s market (well above 6-months absorption).

Whether you are a buyer, seller or investor, the market absorption rate conveys information that you simply must understand if you want to achieve the best real estate outcomes. Visit this blog each month for a market summary of our primary towns, including absorption rates.

In Part 2 of this series, we’ll take a look at another important real estate statistic: days on market (DOM).

Tags: absorption rate, market absorption, real estate statistics

This entry was posted on Tuesday, January 19th, 2010 at 6:18 pm and is filed under Buyers, Real Estate 101, Sellers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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