The Headrick-Wagner
Report
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CALCULATING INVENTORY LEVELS
An
Absorption
Rate is the total sales to occur per month. Typically it is derived
over a period of 6 or 12 months. (i.e. 60 sales occurred in the past 12
months indicates 5 homes sell per month) The Absorption
Rate is 5/month.
The
Inventory Level is the relationship
between the total number of listings available and the absorption rate. It is reported in "months supply." (i.e.
if there are 10 on the market, and the absorption rate is 5, that results
in a 2 months supply of inventory.
This
technique is valuable to appraisers and real estate professionals in both
macroeconomic and microeconomic situations.
Macro markets may include regions, MSA’s,
counties, parishes or individual communities.
Micro markets could include neighborhoods, subdivisions, school
districts, property types, and price ranges.
The months supply is an important number, which calculates the inventory
of homes available in relation to the number of homes to sell per month.
A balanced supply would be 4 to 6 months worth of inventory. Greater than
6 months would be an oversupply, and less than 4 months would be an undersupply.
Our
market studies include Pending Sales.
We believe this data to reflect the most current actions of the
real estate market. Some do not
include pendings in their absorption rate analysis
and if that is the case, we would then consider an undersupply to be under
4 months, a balanced market to be 4 to 6 months, and an oversupply to
be greater than 6 months.
Our Inventory Levels are calculated like this: Take the number of sales to have occurred in past 12 months,
add in the current pendings, take that total
and divide by 12. This creates
an absorption rate over a 12 month period to remove the seasonal fluctuations
that may take place in the marketplace. Once the Absorption Rate is figured,
the current total number of listings should be divided into the average
monthly sales to create the months supply.
Knowing your area's Absorption Rate and Inventory Level,
and its relationship to past trends helps us to predict future trends. Understanding
the Inventory Level, and its relationship to macro (broad) or micro (specific)
trends helps to identify if a sub-market is out performing other areas.
Understanding the market and where it is headed is part of our
job as real estate professionals. It is advised to consistently do
the numbers each month, to be able to track a trend.
The basic algebraic formula:
Months
Supply = A / [(P+S)/12)]
A=Total
# of Active Listings
P =Total # of Pendings
S=Total # of Sales in past 12 months
Months
Supply of Inventory (MSI) - What it means?
* Less than
2 Months of supply will place strong pressure on prices upward, that could
result in as high as double digit appreciation.
* 3 to 4 Months of supply will place pressure on prices upward, resulting
in appreciating values.
* 5 to 6 Months of supply is generally considered a balanced market with
little to no fluctuation in value.
* 7 to 8 Months supply is going to result in downward pressure on prices,
leading to declining values.
* Over a 9 Month supply is an extreme oversupply, placing strong downward
pressure on prices, potentially at a double digit annual rate.
Now you can utilize your own market data that you research
and calculate your absorption rate. Only
three simple statistics need to be created from your own custom MLS search
– the total number of Active Listings, the number of Pendings and the number of Sales to have occurred in the
past year.
You may utilize the output for your marketing materials
by printing off the output page.
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