O.K. lets discuss How “Absorption rates” Plays a key element in identifying Market position Absorption rates today let’s discuss how Pending Home Sales plays a very important role.
Homes sold verses Homes listed: The number of Homes sold in a given month tells us how the market is doing in relationship to homes on the active “For Sale Market”. As an example if a market has 1000 homes for sale and 400 homes have sold in the past 4 months we can determine that 100 homes are selling in a given month. With 100 homes sold per month and 1000 homes on the market for sale we can determine that we have a 10 month supply of inventory (1000 homes divided by 100 homes per month = 10 month supply).
Pending Sales up or down? once we determine how many homes have been selling in a given month such as the example above of 100 homes we know that next month should also have 100 homes sold. When you see that there are 95 homes pending for sale you can determine that sales may be slowing down and you will want to watch the activity closely this may be a trend of a slowing market. Adversely if you see that 110 homes are pending you can determine that sales may be picking up. As sales pick up so will prices rise, days on markets will lesson and the market will heat up. By learning to watch the pending activity we can identify before the masses where activity and pricing is heading and as investors we can use this information to our advantage. Such as a card shark makes his/her strategic moves so must the investor be on top of his/her game at all times.
Next week we will discuss How Rental Rates can give us indication on Market direction.