How Knowing the Market Helps Buyers + Sellers
As a real estate agent in the Iowa City area, a big part of my job is understanding the real estate market and housing trends in the areas I cover: Iowa City, Coralville and North Liberty. It’s important to analyse that data to help buyers and sellers understand the Iowa City area real estate market.
Buyers don’t want to pay too much for a home, sellers don’t want to list their home for less than the house is worth. In both cases, the most effective way to figure out the value of a house is to look at market conditions. (There are other ways to establish value of a house, for instance the appraised value, but when it comes to buying or selling a house we typically work with “market value”). Of course a market report isn’t exactly going to help you right this minute to decide what to offer for a house or what you should price your house at when you list it. You need more specific neighborhood data for that. What it does do is give you an idea of how the market is trending. And that’s a very good place to start!
What is the Absorption Rate?
In the next few weeks you can expect to see a lot of market reports included in my blog on this website and my other website, ICHomesforsale.com.
At the start of a New Year it seemed a good time introduce new ideas into my market reports and starting this month, along with the Absorption Rate, I’ll also be including information about the Contract-to-Listing Ratio of homes listed on the Iowa City MLS. Just to remind you, the absorption rate is the time it takes for the market to “absorb” homes. In other words it covers the turnover rate of homes on the market. This is a calculation that looks at past home sales and homes currently on the market. Effectively it looks at past performance of home sales and from this data we extrapolate that it will take an average of x amount of days to sell a house. It’s not a guarantee of how long it will take to sell a house, but it does help set seller expectations to know how the market is trending. Based on the inventory of homes on the market we know that it’s a balanced market, a seller’s market or a buyer’s market.
What is the Contract-to-Listing Ratio?
The Absorption Rate is one of the many tools in a good Realtor’s toolbox. Another tool, and in some ways a more effective one when it comes to “real time data” is the Contract-to-Listing Ratio. 
This, as the title suggests, looks at the number of homes under contract compared to the number of homes currently listed as active on the Iowa City MLS. In other words, it looks at what is happening right now in the real estate market and does not take into account past home sales. This is a good way to gauge current market activity at any given time.
If that sounds rather technical, let me clarify by taking a look at the Iowa City real estate market with today’s data. There are currently 226 homes currently listed as active on the Iowa City MLS and 39 homes under contract and showing as contingent or pending. In this particular case the contract-to-listing ratio is 17.2%. (See the calculation below). Of course that on it’s own doesn’t tell you much. You need to know that based on historical data, a market with less than 20% contract-to-listing ratio is less active, a 30% contract-to-listing ratio is quite active. and when it’s over 40% the market is humming along nicely. It is the middle of winter in the Midwest and the cold temps usually lead to a less active market. 17.2% in our particular case can actually be seen as pretty good considering the sub zero temps we’re dealing with right now!
Contract to Listing Ratio Calculation:
39 / 226 = 17.2%
40% and above = Very Active Market
30% = Active Market
20% and below = Less Active Market
It goes without saying that this principle can be used on the micro level too by looking at single market segments like school districts or neighborhoods or single family homes or condos. The more you drill things down to the micro level the more accurate it will get for the house you’re looking to buy or sell. When you’re buying or selling a home one thing’s for sure, the more market information you have about similar homes in similar neighborhoods, the better decisions you can make when you’re buying or selling a home.
Data provided by the Iowa City MLS January 3, 2014
Rich Cederberg eXp Realty says
Happy New Year! Absorption rate is really crucial to understanding the real estate market in a neighborhood, I think it’s great you’re goin to start including it in your market reports Denise.
Denise Hamlin says
Thanks Rich. The absorption rate and the contract-to-listing ratio are both good tools and great ways to check the temperature of the market.