Real Estate Math Understanding Market Statistics

Today, the Tulsa World published an article about the Tulsa real estate marketing is heating up. In that article, they reference several common real estate math terms to describe what is happening in the real estate market. As a future real estate agent, you will need to be familiar with these terms and statistics in your area. In this post, we will focus on the real estate math term “absorption rate”.

The article says:

Prices are up significantly to an average of $163,368, the inventory of homes on the market has shrunk to 10.2 months, and contracts to sell continue to remain high month after month.

When we talk about the inventory of homes, we are really talking about absorption rate. The absorption rate is calculated by a two-step process. First, we determine the average number of sales per month. Essentially, this is the number of homes “being absorbed” each month. Second, we determine how many active listings there are currently on the market. This is the number of homes that “need to be absorbed.” By dividing the number of homes that need to be absorbed (i.e., active listings by the number of homes being absorbed (i.e., monthly sales), we can get the absorption rate.

Check out our latest Real Estate Math in a Minute on this topic:

The other real estate terms that you should be familiar with include: monthly sales, new listings, YoY (Year over Year) statistics, and MoM (Month over Month) statistics. Thankfully, you probably will not have to calculate these yourself (although you should know the real estate math behind these calculations!). Most MLS providers also have services that will aggregate and calculate these statistics for you.

 

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The real estate math behind buying versus renting

The Wall Street Journal recently published an article indicating that vacancy rates have dropped to 4.7% across the nation, resulting in increases in rents. As a real estate agent, you may have renters that question whether or not it is cheaper for them to rent or to buy. While there are many factors to consider (such as how long the person will be living in that area), here’s a few things to tell your prospective buyer to consider from a real estate math perspective:

Consider all of your rental expenses:

  • What is your monthly rent?
  • What does the rent include and exclude? Utilities? Internet? TV?
  • How much would it cost to break your lease early if you decided to buy?

Now consider the expenses of owning a home?

  • Do you have enough down payment to buy a place?
  • What will your mortgage payment be, including taxes and insurance? Consider talking with a lender to see what your options are.
  • What will your expenses be (e.g., utilities, HOA fee, home repairs)?
  • Owning a home allows you to deduct your mortgage interest on your taxes. Will you get a tax break from owning a home?
  • Can you buy a place and rent out one of the rooms? Or rent out your parking space? This allows someone else to help you pay for your mortgage!

As we all know, mortgage rates are at an all time low, making a great case for renters to buy. However, each renter is in a unique financial situation, so in some cases, it may make more sense to rent than to buy. By helping your renter understand the real estate math behind deciding whether to rent or buy, he or she can understand the financial implications of the decision. Even if your renter decides not to buy, you have helped them make that decision. When they ARE ready to buy, they will come back to you!