Questions about absorption rates in DC?
Call L&F at 202 363 9700 or 202 483 6300.
Real estate markets move in cycles. They can seem unpredictable and hard to read. So if you are looking to buy or sell, what’s the best way to figure out price trends? According to Long & Foster's managing broker Holly Worthington, calculating the absorption rate of your particular market is a great place to start.
The absorption rate is calculated by dividing the number of properties on the market with the monthly rate at which homes have been selling. It is expressed in terms of months of supply. For example, if there are 90 homes for sale in your selected market, and 30 homes have been selling per month for the last few months, the absorption rate would be 3 months of supply (90 / 30 = 3). That number gives you a snapshot of the market’s upward or downward trend at a single moment in time. To make your absorption rate calculation as representative as possible of a market you are interested in, narrow down the type of homes, like those in the same area code and price range with the same number of bedrooms.
Also, keep in mind an important rule of thumb: 6 months of supply is considered the threshold between a buyer's market and a seller's market. So if there are less than 6 months of supply, sellers generally have more leverage, while buyers have the leverage if there are 6 months or more.
Here are a couple examples to help illustrate.
Example 1. Take a look at one-bedroom condos under $450,000 in the zip code 20009 that settled over the past six months, from April 1st through the end of September. We see that 19 units sold in April, 16 in May, 13 in June, 27 in July, 15 in August, and 18 in September. That's a total of 108 units sold over six months, or an average of 18 per month. There are a total of 28 one-bed/one-bath units under $450,000 now on the market in area code 20009.
So, dividing 28 homes by the current sales rate of 18 per month yields 1.55. That is, there is 1½ months of inventory available in this subset of DC's market. Put another way, it would take 1½ months to "sell out" if no additional homes hit the market.
The takeaway: This is a strong seller’s market. One could conclude from this data that prices are likely to continue to increase at a steady rate (3% to 5% annual appreciation) in this market segment and that most of the properly-priced property here will sell for within 2.5% of the asking price.
Example 2. Let's take another example. For single-family homes under one million dollars on Capitol Hill, monthly sales were 41 in April, 28 in May, 41 in June, 36 in July, 23 in August, and 37 in September -- a total of 206 houses sold over the last 6 months for an average of 34 per month. There are currently 28 houses on the market in this area at this price.
The takeaway: The absorption rate is an extremely low 0.82 months of supply, making Capitol Hill one of the hottest markets in DC right now.
As you can see, there is a not even a single month of inventory. This is a very strong seller’s market that would indicate strong price appreciation (more than 5% annually), with properly-priced property selling for the asking price or higher. A buyer writing an offer on a Capitol Hill home would need to make the offer very seller friendly or risk losing to a higher offer with better terms. The risk of loss in an escalating market such as this one is that prices go up every month. Acting quickly on a good property here is key.
This article originally published at http://dc.urbanturf.com/articles/blog/sponsored_how_to_find_out_if_values_are_going_up_or_down_/6167
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