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

By
Real Estate Agent with Solutions Real Estate CA BRE 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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Topic:
Home Selling
Groups:
Advice for Sellers
CALIFORNIA REAL ESTATE
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Comments 14 New Comment

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Rainmaker
101,562
Robert T. Boyer
San Diego Real Estate & Mortgage Loans, Ph.D. | VA Home Loan
FHA Loan, VA Loan, Jumbo Loan,FHA Loans,VA Loans,Jumbo Loans

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

August 12, 2010 12:02 AM
Rainmaker
261,219
Nina Rogoff
Your Hometown Realtor in Sharon MA
RE/MAX Executive Realty -

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!

October 02, 2010 10:05 PM
Rainer
41,009
Adam King
Adam King
Metro Brokers - Kings Kastles Denver, CO

p.p1 {margin: 0.0px 0.0px 10.0px 0.0px; font: 10.0px Verdana} span.s1 {letter-spacing: 0.0px}

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
Rainmaker
634,747
Evelyn Kennedy
Alameda, Real Estate, Alameda, CA
Gallagher & Lindsey, Alameda, California

Jeff:

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

August 08, 2011 09:40 PM
Rainmaker
649,467
Sharon Paxson
Newport Beach Real Estate - HOM Sotheby's Int'l Re
HÔM Sotheby's International Realty, BRE License 01501912

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

December 12, 2011 11:55 PM
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Jeff Dowler CRS

Carlsbad CA Homes for Sale (760) 840-1360
What's my Carlsbad CA Area Home Worth??
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