Kristine Dugan, ABR, BS, CRS, SFR
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Vegas Valley Market Dynamics
Posted on July 28, 2010
With so many statistics and numbers floating around the industry, I have found that Absorption Rate and Inventory Depletion are two calculations are two of the most important (I believe the unemployment rate would follow up in third place - which I will elaborate more on one of my next blogs). By utilizing Absorption Rate and Inventory Depletion, it allows one to observe the amount of listing inventory available on the market and is an accurate calculation of how quickly the inventory is being sold. An easier way to state this is if no other homes were put on the market as of today, how long would it take for the buyers in the Vegas Valley to buy up all of the homes. Currently, Las Vegas has under 3 months of inventory which a "healthy" market is 5 to 6 months of inventory.
What is Absorption Rate and Inventory Depletion - and why are they the best indicators of Market Performance?
As it relates to the Las Vegas Valley Real Estate market, I first heard the term "Absorption Rate" and "Inventory Depletion" in a class that I earned my Certified Residential Specialist Designation (CRS). My initial thought was that they are something very complicated. You know one of those tedious things to learn. But I was wrong. Perhaps wordy, and nothing more than that, "Absorption Rate" and "Inventory Depletion" are very simple and immediate to understand.
"Absorption Rate" and "Inventory Depletion" are also the most important guide we know of to help understand the supply of inventory available and how long it will take (in months) for the current demand of buyers to "deplete" the inventory in the local marketplace.
What is Absorption Rate and Inventory Depletion?
"Absorption Rate" means the average number of homes sold per month over a specific period of time. That's it, and there is nothing more complex about it.
Absorption Rate may be applied to a market as a whole, or to a particular price range, such as $200,000 to $250,000, for example.
"Inventory Depletion" is just a fancy way of saying how long it will take the homes that are on the market to sell.
"Absorption Rate" and "Inventory Depletion" are the best means of tracking market performance. They are usually used to indicate "overall market performance", or how an entire market is doing.
Why are Absorption Rate and Inventory Depletion calculations Important?
"Absorption Rate" and "Inventory Depletion" provide a truthful projection of the competition in the marketplace by providing accurate figures of supply and demand. It is also an indication if the local real estate market is a "Seller's Market" or a "Buyer's Market" which help Buyers and Sellers create a strategy when approaching a Real Estate Transaction.
When Inventory Depletion is five to six months, this is considered a healthy amount of inventory or a "Neutral Market".
Anything less than five months is considered a "Seller's Market" due to a low/shortage of inventory and constant demand which can contribute to a higher amount of competition in the market place that increases price. Additionally, the lower the Inventory Depletion, the faster properties are selling.
Conversely, an Inventory Depletion of more than six months is considered a "Buyer's Market" due to a constant or increasing inventory and a decrease in demand with the competition being scarce and the price will likely go down. The higher the Inventory Depletion, the longer it will take to sell a property.
In the "Inventory Depletion" examples above, the first one is an example of a "Neutral Market" (5-6 months of inventory). The second example is a "Seller's Market" (4 months of inventory). The last example is one of a "Buyer's Market" (12 months of inventory).
By calculating Absorption Rates and Inventory Depletion, it helps to have a better understanding of current, and sometimes, coming trends in the Las Vegas Valley area.
For current Absorption Rates and Inventory Depletion calculations for the Vegas Valley, click here.
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