One of the most talked about topics in real estate is the type of market we are currently in. Everyone has predictions and tips for the market, but what market are we in 2018? How do you tell which market you’re in? We’ve got the answers.
The Absorption Rate
To understand what type of market we are in, you’ve got to realize the absorption rate. Absorption rate is a simple equation that determines how much inventory is on the market.
You calculate the absorption rate by determining the number of homes that closed within a specified period (e.g., one year) in a particular area. You take that amount and divide it by the number of months in that timeframe (e.g., 12), and that’s your absorption rate or the rate at which houses are closing in that specific area in that timeframe.
To calculate the current inventory, you calculate the number of homes that are on the market currently in the same area and divide it by the absorption rate. That number will tell you how many months it will take to go through the current inventory.
What is a buyer’s market?
Now that you have a basic understanding of absorption rate, you’re ready to see if it’s a buyer’s market. If the monthly absorption rate is more than six, it’s a buyer’s market. That means, there are more than six months worth of inventory available. So you may have a more difficult time selling your home because the market is pretty saturated.
Why is it called a ‘buyer’s market’?
It’s called a buyer’s market because it’s the perfect time for buyers to purchase property for a reasonable price. Why is it a reasonable price? Because a house is only worth what people are willing to pay for it, and if no one is paying for it, the home sits, and the price lowers until someone jumps in. Then more buyers come out of their shell, buy the available listings, and create a market scarcity. This leads to a seller’s market.
Let’s look at an example: Right after a recession, there are a bunch of freshly built houses that cost around $300k to make, but no one is buying them. It is a buyer’s market. There are too many houses on the market, so these house prices begin to drop. Finally, these houses all fall to $80k, and an investor jumps in and swoops up as many as they can hold. The amount of inventory made the prices drop so low, that a buyer could get a much more beautiful house for an excellent price. We’ll come back to this example in a bit.
What is a seller’s market?
A seller’s market is where the monthly absorption rate is less than six, meaning in less than six months, the entire housing inventory will be bought up. This is good news for sellers, but not so great news for buyers.
Why is it called a seller’s market?
It’s called a seller’s market because it’s the best time to sell your house and get a lot of money for it. Because homes are so scarce, people are willing to pay more for those houses. This drives home prices up, and many houses end up with bidding wars on their hands, where multiple offers stream in. Let’s go back to our example.
That investor who swooped in and snatched up all those homes to the tune of $80k a piece? Well, he decides to play it cool for a bit. He rents out the houses and makes some income while he waits for the home prices to rise a bit. Finally, the housing market turns back up, and each of these homes become worth their original $300K. This is the seller’s market this investor has been waiting for! He sells each piece of property and makes $220k from that transaction, not to mention the amount he made from renting. This is one guy that knows how to play the market system!
2018 Overview: Buyer or Seller’s Market
Okay, let’s cut to the chase. Now that you know what determines a buyer’s and seller’s market, you’ve gotta know: Is it a buyer’s or seller’s market in 2018?!
Let’s take a look at the U.S. specifically, just to make things easier. And just to be clear, we are looking at the market average, not each specific area. While each area can experience a fluctuation in the market because of their micro-economy, we want the nation’s standard.
January started off the year with a bang as pricing houses continued to rocket from 2017. The median house price in January was $269,500, which was up 8% from 2017. The average days on the market was down 7% from the year before (meaning homes were selling faster), and the inventory was down 8% at 1.23 million listings.
June’s inventory continued to decline, although at a slower pace than previous months. The median house price was $299,000, reaching the highest median price since 2012. The inventory grew by the typical 4% due to spring listings but has still decreased 5% over last June’s stock.
What This Means For the Future
Although no one can say for sure, many of the economic signs point to it staying a seller’s market for a while longer. Those who remember the recession of 2007-2008 might be feeling a bit timid of the market, as it wasn’t very long ago that we saw similar marketing trends. Experts reassure, however, that although house prices continue to rise, many of the signs that were prevalent before the bubble burst are not here now.
Need a local expert that knows how to help you buy and sell no matter what the market is doing? Then you need Clever. With the best real estate agents in your community on call, Clever makes it easy for you to find the help you need fast. Call us today at 1-833-2-CLEVER or fill out our online form to get started.
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