How Important IS Inventory When Buying or Selling? Very!!

By
Real Estate Agent with Solutions Real Estate CalBRE Lic #01490977

House for sale signBuyers and sellers may wonder "how important is inventory when buying and selling?" Agent know that it is VERY important (well, most do...some seem to not pay much attention). In more formal circles we refer to it as absorption or absorption rate, i.e., how much time will it take for the current inventory to disappear (be absorbed) at the current rate of sales, if nothing new comes on the market. 

Absorption rate provides a good indicator of how fast homes are selling, and is used, in a general sort of way, to classify the type of market - buyer's, seller's, or stable. There is plenty of discussion around what classifies a market as a buyer's market, for example. In some sense it may not really even matter what you call it - understanding the inventory, generally and specifically, and your competition as a seller is likely much more valuable. The point, though, is the amount of inventory is a good indicator of supply and demand and this can affect your decision to buy, and perhaps more importantly, to sell.  

Bressi Ranch homes Carlsbad CaliforniaBuyers certainly realize that they have lots of choices, or limited choices in their home searches, and this may cause them to act more quickly when choices are limited. And when there is lots of inventory there is a tendency to want to see it all. If homes are not selling quickly there is the perception that there is no rush. Not always the case, however. 

So why should you consider what the absorption might be and what it means?

And how might you look at it so it is most meaningful?

First, let take a look at some information I pulled from the San Diego MLS for the La Costa area 92009 in the Carlsbad real estate market as illustration, at the end of June 2009. Here we consider only detached homes (otherwise known as single family homes in our real estate lingo). While some people use 1 month as the period of time, I learned to use 3, or even 6, months in my CRS class, which makes more sense because of how the sale volume can shift in a short period such as 1 month. 

ACTIVE on market = 162 homes

SOLD in 3 months = 109, or an average of 36 per month.

ABSORPTION = 90 days/109 homes sold in 90 days X INVENTORY  = 134 days or 4.5 months 

Or another way to calculate it: 

# ACTIVE / AVERAGE # SOLD per month over 3 months = 162 / 36  =  4.5 months 

House for sale signIn other words, 109 homes sold in 3 months, at a rate of 1 every .82 days (or 36 per month). With 162 to sell, it will take 4.5 months to sell the current inventory. That's pretty darn good in this market, with some areas of the country having inventory of well more than a year, and higher. 

So what does that mean for sellers? Well, for one, with this rate of absorption they have a 22% chance of selling in the next 30 days, barely 1 out of 5 chances. So while 1 of 5 homes will likely sell in the next month, 4 out of 5 will not. Hmm. Could be important to know in terms of positioning a home to sell. 

But let's drill down to another level - price range. Generally homes in different price ranges sell at different rates because of supply and demand. So you will likely find a different level of competition (more homes, or fewer) in the price range your home is in, and thus a different inventory level. And this may have a significant impact on what you can reasonably expect as a seller, on average.

Here are the data for the La Costa real estate market (92009) at the end of June 2009. 

Price Range

# Active 

   Absorption Rate  

   % Chance of Selling  

In the next 30 days

Under $400K

2

2 months

50%

400 - 500K

7

3.5 months

29%

500 - 600K

19

3 months

33%

600 - 700K

22

2.5 months

40%

700 - 800K

25

4 months

25%

800 - 900K

23

2.2 months

45%

900K - 1 Million    

20

8 months

13%

1M - 1.25 M

26

15.3 months

7%

1.25M - 1.5M

18

13.5 months

7%

1.5M - 2M

10

20 months

5%

Hanover Beach Colony homes near the beach in CarlsbadWhat's interesting to note are the differences across the price ranges in inventory - the number of available homes - and how quickly they are selling. Take, for example, the $700 - 800K range compared to the $800 - 900K range. Both have about the same number of homes for sale, but the higher price range has a much faster absorption rate. Thus sellers have a far better chance of selling in 30 days than those in the lower range. 

Of course all this is based on averages, and various factors (condition, location) can impact sales time, but the results are telling.

Could this not be of tremendous value when talking with potential sellers about what is going on in the market in order to decide how to position their home for sale effectively?

I suspect if one looks at other parameters, such as new vs. resale, or within certain specific areas, those results could also be enlightening. 

I'm not an economist, nor a statistician. And I don't have a crystal ball. But I keep learning more about the value of looking at and understanding absorption rate, and talking with buyers and sellers about why they should care.

I invite others here in AR to share their thoughts as well in terms of how it can and should be used. We can all learn from each other, and markets can vary so much. And there are different perspectives on these issues as well.

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Those are some pretty interesting statistics!  DAC

Jul 31, 2009 10:52 AM #1
Rainer
4,962
Julie Cleland
Prudential California Realty - South San Francisco, CA

Showing your seller, or buyer for that matter, helps to bring focus to the fact that buying or selling a home is a business decision and normal rules of business (like supply & demand) apply.  It also sheds light on how your particular market may differ from what is being heard on the national news.  Great post!

Jul 31, 2009 11:28 AM #2
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages Connecticut - Middletown, CT
Your Connecticut Mortgage Expert

Jeff, I am not a Realtor, but if I were, inventory and absorption rate would be two things I would be on top of all the time.

Jul 31, 2009 02:41 PM #3
Rainmaker
341,459
Elizabeth Bolton
RE/MAX Destiny Real Estate Cambridge, MA - Cambridge, MA
Cambridge MA Realtor

Hi Jeff ~ This is a great presentation.  Interesting - I had never heard of calculating absorption rates by quarter. I'm going to have to mull that one over.  I think I need to be bright eyed and bushy tailed before I try to work this through in my head.

Liz

Jul 31, 2009 07:17 PM #4
Rainmaker
698,112
Sharon Paxson
HÔM Sotheby's International Realty, BRE License 01501912 - Newport Beach, CA
Newport Beach Real Estate - HOM Sotheby's Int'l Re

The higher end market definitely is softer right now in this area as well. I like how you added the absorption rate for each market. Excellent post as always!

Jul 31, 2009 08:13 PM #5
Rainmaker
573,927
Terry & Bonnie Westbrook
Westbrook Realty Broker-Owner - Grand Rapids, MI
Westbrook Realty - Grand Rapids Forest Hills MI Re

We talk about it and the affects of large quantities of home and how buyers make decisions.  Most sellers understand but they thinktheir home is special and it doesn't apply to them only to everyone else.

Jul 31, 2009 09:29 PM #6
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Jeff Dowler CRS
Solutions Real Estate - Carlsbad, CA
Carlsbad CA Homes for Sale (760) 840-1360

Dennis - well it is enlightening to look more closely at any market, I suspect.

Julie - Thanks. It really does demonstrate to need to look locally to see what is actually going on and how it may affect buyers and sellers.

George - surprising I often find agents are not paying attention to this. At least you don't hear a lot of talk about it, and it is so important.

Jeff

Jul 31, 2009 10:26 PM #7
Rainmaker
648,439
William James Walton Sr.
WEICHERT, REALTORS® - Briotti Group - Waterbury, CT
Greater Waterbury Real Estate

Jeff, this is a great explanation of why understanding and knowing what inventory and absorption rates are for one's markets. Also, I liked how you broke down absorption rates by price. That is good information for all sellers. This is one of the reasons why I have been including inventory and absorption rate info in my zip code market reports.

Mar 16, 2010 12:46 PM #8
Rainmaker
558,669
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

I tend to use the term "Months Housing Supply" as that value (1-4 months of supply being a buyer market; 5-6 even, 7+ buyers) where as the absorption rate is simply the rate at things which sell and feeds into the final months of housing supply calculation.

While I use these to prep sellers, it only takes one buyer and the whole condition aspect and pricing well out of the gate can go a long way to making the odds in your favor.  I also have created a pretty sophisticated spreadsheet with the odds of selling by relevant season, price range, etc., and and have further refined it by both currently active and closest competition and recent sold comparables, and putting all this together has given me a pretty comprehensive view.  Unfortunately, our MLS (Rapattoni) can't produce this easily, especially, the chance of selling -- which is mind boggling to me that this is left to individual companies or agents.

May 15, 2010 04:51 PM #9
Rainmaker
101,562
Robert T. Boyer
FHA Loan, VA Loan, Jumbo Loan,FHA Loans,VA Loans,Jumbo Loans - La Jolla, CA
San Diego Real Estate & Mortgage Loans, Ph.D. | VA Home Loan

Jeff, like you I break down areas by price range, because it is very telling.  I also viewed Chris' post.  also very interesting.

Aug 12, 2010 12:02 AM #10
Rainmaker
265,029
Nina Rogoff
RE/MAX Executive Realty - - Sharon, MA
Your Hometown Realtor in Sharon MA

Jeff, this is such great information for sellers. You really gave me better information and language to use with sellers than I have had before. Thank you!

Oct 02, 2010 10:05 PM #11
Rainer
43,525
Adam King
Metro Brokers - Kings Kastles Denver, CO - Highlands Ranch, CO
Adam King

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I like your presentation on the facts/trends.  The absorption rate seems to be the one thing that sellers understand more than anything when they realize just how many months it takes to clear all of that inventory out.  Studying the absorption rate and passing these types of reports to my clients has enabled my clients to have an accurate grasp on the market and where it is going.  However, your presentation is much better than mine so I think I need to work on a better and easier to read version.  Thanks, Jeff.

May 19, 2011 07:52 AM #12
Rainmaker
655,287
Evelyn Kennedy
Gallagher & Lindsey, Alameda, California - Alameda, CA
Alameda, Real Estate, Alameda, CA

Jeff:

Good explanation of absorption.  May I use some of your information to explain this concept?

Aug 08, 2011 09:40 PM #13
Rainmaker
698,112
Sharon Paxson
HÔM Sotheby's International Realty, BRE License 01501912 - Newport Beach, CA
Newport Beach Real Estate - HOM Sotheby's Int'l Re

Jeff - excellent post and I see similar trends with the luxury market over one million. Those properties are moving more slowly.

Dec 12, 2011 11:55 PM #14
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Jeff Dowler CRS

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