Real Talk: Understanding buyer’s and seller’s markets

Real Talk: Understanding buyer’s and seller’s markets
(File Photo)

By Elizabeth Lucchesi

Though home sales numbers are booming, there is a nationwide drought of available housing. August data reported inventory numbers down by nearly 20% compared to August 2019, with unsold inventory currently offering a three-month supply at the current lighting speed sales pace.  Last month, nearly 70% of homes nationwide went from just listed to under contract in less than 30 days, with the average days on market at 22.

Real estate professionals predict continued increases in housing demand, particularly in areas attractive to those who can work from home. 

“There are plenty of buyers in the pipeline ready to enter the market,” Lawrence Yun, National Association of Realtors’ chief economist, said.

In its recent 2020 Work From Home Counties study, NAR published the top 30 counties across the nation, with at least 5,000 households as of 2019, with a supportive environment for working remotely. The study considered nine factors, including internet connectivity, urbanization, office-related jobs and population growth over the past five years, among other measures, to calculate a Remote Work Score.

Among the counties with the highest scores are four Virginia locations, with Loudoun County being fourth and Fairfax County 30th.

Absorptions rates

An absorption rate is a calculation used by real estate professionals to help price and value homes for sale. Absorption rates can also serve as a gauge for builders trying to determine whether it makes sense to build more homes or wait it out. 

The rate is calculated by taking the number of homes sold in the given time frame — say, over 30 days — and dividing that number by the total number of available homes in the market. 

For example, in a hypothetical housing market, there are 1,000 homes for sale. 250 of those homes sold quickly in just one month’s time. The absorption rate in this market is 25%, which is the rate you get when you divide 250 by 1,000. 

To understand how long it would take for a given market to diminish its housing inventory, flip the equation.  In the same hypothetical market, divide the total number of available homes (1,000) by the number of homes sold over the given time frame (250). In four months this hypothetical housing market would run out of homes for sale. 

Let’s get local 

Let’s calculate the 2020 absorption rate for detached homes sold at $1.25M or more in Alexandria City.  82 homes were sold in this area from January to September 2020 and 30 homes were available for sale as of September 2, 2020. 

First, determine the rate of home sales by dividing 245 (the time frame) by 82 (the number of homes sold). The calculation returns 2.987 days per home.

Next, flip the equation to determine how much time it will take to extinguish the supply of available homes for sale (assuming inventory remains static).  Multiply 30 homes (homes available for sale) by 2.987 (the rate of home sales) to find an answer of 89.6 days.

Finally, convert the number of days to months. If market conditions remain the same and no new listings come on the market, it will take 2.93 months for the current inventory to sell at the current pace of the market.

Relation of absorption rates and market conditions

Savvy buyers and sellers use absorption rates to determine if it’s a smart time to make a competitive move in the market.  As a general rule of thumb, absorption rates of 20% or more are considered to benefit the seller. This is when buyer demand is higher than the supply of active listings and homes are sold quickly.  When the formula is flipped to find the rate of home sales, sellers should look for the current supply of homes to be sold between 0 to 5 months.

Buyers will typically increase their chances of getting a good deal on a home sale when absorption rates are less than 15%.  This is when buyer demand is less than the supply of available homes for sale.  

If buyers are contending in a seller’s market with rates above 20 percent, it’s important to gain a competitive advantage by teaming up with an experienced realtor who will help navigate the buying process and beat out other buyers.

The writer is the founder of the LizLuke Team of Long & Foster Real Estate. She is also a buyer and seller agent.