Maine Real Estate News

In a recent post we reviewed the absorption rate of several southern Maine towns and cities for YTD 2008, with a comparison to 2007. However, we did not go into a great deal of explanation of exactly what the absorption rate is and how it has an impact on buyers and sellers.

The ABSORPTION RATE is the mathematical representation of the relationship between supply and demand. The total amount of available homes for sale is divided by the total amount of homes sold in the previous period (in our case the first 7 months). The resulting number represents the number of time (measured in weeks) it would take to sell the entire inventory.

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)

When reviewing the results, several important factors must also be considered, such as:

1. To have real meaning you first must consider overall results, then continue to break them down – by town, by price range, by specific neighborhood.

2. 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 a property will actually sell than any mathematical formula.

Failure to look at the data at its most discrete level can result in an unclear picture of the market.

HOW IS KNOWING ABSORPTION RATES VALUABLE?

FOR SELLERS:

Knowing the market conditions can help you determine the appropriate asking price for your home, based on your need for a timely sale. If the Absorption Rate in the 300K to 500K range is 4.2, while 500K to 800K is 17.4, and you were considering pricing around 510K, you might want to reconsider and price at 499K instead if you need a faster sale. If you can afford to have your home on the market for a year or more, then pricing it at the 510K would be fine.

FOR BUYERS:

Knowing the market conditions in the specific areas you are looking to buy in will prepare you for negotiating. If the Absorption rate in Town A is 4.5, while in Town B it is 13.8, and you want to negotiate a lower than asking price, you can see that your chances of success are much greater in Town B.

In the end, understanding the market conditions provides valuable insight in to evaluating pricing, negotiating offers and closing sales, in all types of markets. As the Maine Real Estate chart in our previous post clearly demonstrates virtually all towns and cities in the greater Portland area, on a macro level, are in a “buyer’s market” condition, and should continue to be so for the foreseeable future. But getting to the details is imperative!