In real estate, there are 2 different numbers that are important to look at in determining the status of the market.  These 2 number calculations are the Months Supply of Inventory (MSI) and the Absorption Rate.

The Absorption Rate  is the rate at which real estate is sold or absorbed in a specific area.

The Absorption Rate can be calculated by using the number of homes sold per month and the number of active listings. The sold homes per month can be found by dividing the total of number of homes sold in a year by 12 to get the average homes sold per month (193 sold in Tahoe Donner in 2008 divided by 12= 16).  You can also find this number taking the total number of homes sold during a certain month (16 sold in Tahoe Donner last month). You divide the number of homes sold during 1 month by the number of active listings (16 divided by 142 = 11%). 11% is the rate at which the current market is being absorbed or selling at.

The Months Supply of Inventory is an estimation of how long it will take for all the homes on the  to be sold, or absorbed, based on how many homes are currently on the market and the rate homes have sold in the past (absorption rate).

The MSI is calculated by taking the number of homes listed (ex. 142 active homes in Tahoe Donner) divided by the number of homes that sold last month (ex. 16 in Tahoe Donner for April 2009).  The number of sold homes can be figured out by taking the total number of sold properties in an entire year (ex. 193 in Tahoe Donner for 2008) divided by 12 which would give an average of homes sold per month (ex. 16 for Tahoe Donner in 2008).  The number of active homes is divided by the number of sold homes which will give the months supply of inventory (MSI). Currently in Tahoe Donner, it would be about 9 months. This can also be figured out by the number of homes pending or under contract but this is sometimes not as accurate as not all homes that are pending actually close.

Why is the Months Supply of Inventory important? This number shows how balanced the market is.
MSI less than 5 months = seller’s market
MSI equals 5-7 months = balanced market
MSI greater than 7 months = buyer’s market

How can this help you? For Sellers, these numbers show how much competition you will have.  If an owner is planning on putting a property on the market when there is already 20+ months of inventory, they may want to consider some price reductions and pricing the property competitively.

For Buyers the MSI will tell you how negotiable sellers may be in different markets. If there is 5 months of inventory in Tahoe and 12 months of inventory in Sacramento, the sellers in Sacramento will probably be more negotiable.

Median Price & Average Price

2 other numbers that help show some real estate market figures are the median and average house of a home.

The Average Price is found by taking the price of every home that is listed and adding them together. You then divide this number by the number of homes listed. For example, there are 148 total homes listed in Tahoe Donner. These homes range in price from $294,500 to $2,250,000.  If you were to add up the number of every home’s listed price and then divide that by 148, you would get an average price of $825,827.

The Median Price is the most occuring number in any set of numbers. To find this number, you would take a series of numbers ranging from 1 number to the last and find the number that is exactly in the middle. For example, if there are 147 homes, you would pick the 74th number. In Tahoe Donner, that number is currently $699,000. That means that the most homes that are currently listed are close to that $699k price.

The Median & Average Price are important numbers to analyze in trying to tell how the market is now compared to a time in the past. For example, the average home sale price for Tahoe Donner in April of 2008 was $836,793. The average home sale price for Tahoe Donner homes sold in April 2009 was $616,740. This shows a 27% decrease in the average sales price for homes sold in Tahoe Donner from one year to the next.