Wherever I go, people ask me, “How’s the market?”  I usually respond – “it depends.”

The real question and answer revolves around the absorption rate.

Certain segments of the market are healthier or weaker and the method of determining this is by calculating the absorption rate for the particular market segment.

The National Association of Realtors (NAR)  has determined that a market in balance between buyers and sellers has a 6-month supply of houses. This means that if no one else listed a house for sale, how long would it take for everything else to sell.

The formula is:

Total sales in the last 6 months divided by 6 = Monthly sales rate

Then take total houses for sale right now divided by the monthly sales rate and this equals the absorption rate

A current example would be:

Erie County housing listings between 80,000 and 120,000

Number of properties that are a closed sale or rented in the past 6 months: 779

Number or active properties: 567

779/6=129

567/129=4.39

Meaning there is a 4.39-month supply of houses or the percentage of homes that enter the market and actually sell.

A low number would represent that it is a seller’s market, where as, a high number would represent a buyer’s market.  You can apply this specific formula to a township, a price range, a county or an entire state. It is one of the key indicators used by Lawrence Yun, chief economist for NAR when he describes patterns of activity in our country.

Area Price Range Number of Properties Number of Active Listings Month Supply
Amherst 175,000- 225,000 107 64 3.5
Erie 500,000 – 1,000,000 48 120 15
Erie 175,000 -225,000 392 326 4.99
Phoenix       6.4
Las Vegas       3.2
Atlanta       6.4

When you are setting the asking price for a property, it’s a good idea to have your realtor perform these calculations. If there is a limited supply you can push the envelope and ask on the high end. If you’re fighting a large supply, you had better price it on the button.