I’m going to start including Buckhead, Sandy Springs and Dunwoody market data on this blog. I think an appropriate way to begin is with an explanation of what the absorption rate is, how it’s calculated and why it’s important. The absorption rate is often misunderstood by consumers and agents. Rather than reinvent the wheel, the following is an excerpt from an article I found that does a great job explaining the absorption rate. The only thing I would add is in the higher price ranges, homes can take longer to sell, so I’m not sure if an absorption rate of seven months would translate into a buyer’s market in Buckhead:
ABSORPTION RATE is the mathematical representation of the relationship between supply and demand. The total amount of available product is divided by the total amount of product sold in the previous month. The resulting number represents the number of months it would take, at that same pace, to sell the entire inventory of product.
“Normal Market” conditions exist when the Absorption Rate is between 5 and 6 months.
“Sellers Market” conditions exist when the Absorption Rate is lower. (1-4 months)
“Buyers Market” conditions exist when the Absorption Rate is higher. (7+ months)
Here is a (fictitious) example:
Anytown, USA has 252 homes currently on the market.
In the past month, 78 homes sold
252 / 78 = 3.23
This would be a Sellers Market, but is approaching “normal” conditions.
CAUTION SHOULD BE TAKEN however. Don’t think that Absorption Rate is all you need to look at to determine the condition of the market. In fact, many people misuse or misunderstand the application of this important ratio, and overlook several important factors:
To have real meaning to you in your practice, or in understanding the market you are buying or selling homes in, you need to look at not the overall conditions, but the local, price-range specific conditions.
The ratio reflects a general condition. That is, it is not specific. Specific property features, condition, and price will do more to determine how fast it will actually sell than any mathematical formula will.
I recommend calculating the Absorption Rates in your specific areas, but broken down into several geographic areas and price-range specific categories.
Thanks to Rich Schiffer for writing this article. If you’re interested in reading it in its entirety, then click here.
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So, what’s your feeling about the Buckhead market given this data? I think I read on your blog that the higher price range has a 9 year supply of homes.
There is a house that recently went on the market in Buckhead, on a very prestigious street. I went into the tax records to see what the owners had bought the home for, and I was shocked to see that they bought it for only $550K in the late 90s! There is no way a house on that street with that amount of land would sell for that amount any time again, even with a depressed housing market.
The house was renovated, and the asking price is much higher than what they bought it for – as it should be, the land is gorgeous.