Real Estate Supply and Demand

Real Estate Supply and Demand

Source: Multiple Listing Service of Greater Cincinnati

One of the best real estate metrics is calculating supply and demand also as “absorption rate”. 

As long as I’ve been in real estate it’s been one of the best indicators of how the local Cincinnati real estate market is doing.  And more importantly which way prices are heading.  The chart above covers through the end of 2018 and compares the ups and downs of home sales in greater Cincinnati.  And at the end of 2018, Cincinnati had a 3-4 month supply of homes for sale.

What is “Absorption Rate”? 

It’s the best way to tell how many months it would take for all current listings to sell if nothing changes.  When it’s calculated you have to assume no new listings will pop up and financing will remain the same.  In short, it measures supply and demand.  And according to NAR (National Association of Realtors), knowing the months of inventory also predicts whether the market is a “seller’s” or “buyer’s” Market.

What is a “buyer’s” versus a “seller’s” market?

According to NAR: 

0-6 months of inventory  equals a  “seller’s market”   (Cincinnati defines 0-5 months of inventory equaling “seller’s market”)
6-9 months of inventory equals a “balanced market”
9+ months of inventory equals a “buyer’s market”

Calculating Absorption Rate

There’re different ways to calculate the absorption rate.  Some Realtors® use a model which uses sales for the last 6 months.  Some like a shorter timeframe for sales since it more accurately reflects the current trends. 

It really is a matter of preference. 

The basic formula:  Absorption rate is calculated by dividing the total number of homes for sale by the number of homes sold per month. For example, if there are 30 active listings for sale in a given neighborhood, and 6 homes sold last month, then there is currently 5 months of inventory (30 divided by 6).

As explained by NAR:  
In a seller’s market, there’s not enough inventory to meet demand.  The low supply puts pressure on buyers to pay more often finding themselves in multiple offer situations

In a buyer’s market, there are more homes for sale than buyers ready to buy.  The high supply gives buyers the upper hand in negotiating.  During a buyer’s market homes are up for sale longer and sellers become more flexible with pricing.

Tracking the absorption rate/months of inventory for your particular area and price range is essential to marketing your property at the right price.

Want to know the absorption rate for your property?  Interested in buying or selling in greater Cincinnati.  Feel free to contact me.