Buyer’s Market Definition

A very simple way to explain the definition of a buyer’s market is a simple statement such as, a market which has more sellers than buyers. Low prices result from this excess of supply over demand.

So how does the real estate profession calculate statistics to arrive at the conclusion there is more supply than demand ?

Most real estate professionals define market conditions by using the absorption rate formula. So what is an absorption rate? An absorption rate is the mathematical representation of the relationship between supply and demand.
The total quantity of available homes is divided by total homes sold in the previous month. The results represents the number of months it will take, at that same pace, to sell the entire real estate inventory of a local market area.

Here is a fictitious example:
•    Kitsap County has 989 homes currently on the market.
•    Last month, 92 homes sold
•    989 / 92 = 10.75
•    So the Kitsap County area has 10.75 months of inventory.

But, remember the answer is only true if the housing market stays the same. The same meaning that there is always 989 homes on the market and each month 92 of those homes sell.
Absorption rates allow us to give some kind of mathematical equation to determine what type of real estate market we are experiencing at any given time.

Remember that real estate is local and that towns, cities, counties and states all have different absorption rates and will have different markets.
There are also different markets within a market. You might have a buyer’s market when you look at high end homes and yet a seller’s market when it come to 1st time home buyer properties.

•    NORMAL MARKET :: conditions exist when the Absorption Rate is between 5 and 6 months
•    SELLER’S MARKET :: conditions exist when the Absorption Rate is lower. (1 – 4 months)
•    BUYER’S MARKET :: conditions exist when the Absorption Rate is higher. ( 7 plus months)

b] Are we in a Buyer’s Market?

The Definition of Absorption Rates:

Number of weeks it takes to sell the current inventory at the present rate of sales. Using absorption rates can help you define markets. My definition breaks down like this…

Normal Market – Between 5 and 6 months of inventory. (21.65 – 25.98 weeks)

Seller’s Market – Between 1 and 4 months of inventory. (4.33 – 17.32 weeks)

Buyer’s Market – 7 months and higher. (30.31 plus)

Now remember that absorption rates just track trends and isn’t an exact science! Here is the absorption rate trend for 2008.