What is an Activity Index

The Activity Index is a critical metric used in real estate to understand the dynamics of a specific market. It is particularly useful for both buyers and sellers as it offers a clear view of how quickly properties are moving within a particular geographic area. The Activity Index is calculated by dividing the number of pending properties by the total of active and pending properties, and then multiplying the result by 100 to express it as a percentage. This calculation provides valuable insights into the market's absorption rate, which essentially measures how fast properties are going under contract compared to the total inventory available.
Pending properties are those that have received an accepted offer and are currently in the process of being sold. These properties are under contract, but the sale has not yet closed, meaning they are not officially off the market. The number of pending properties in a market is a direct reflection of current buyer activity and demand. A higher number of pending properties suggests that the market is active, with buyers quickly making offers on available homes. This is an important indicator for both buyers and sellers, as it signals a competitive market where properties may not stay on the market for long.

Supply and Demand

Active properties are those that are currently listed for sale and have not yet received an accepted offer. These properties represent the available supply in the market. The number of active properties provides a snapshot of the inventory available to potential buyers. A larger number of active properties suggests a higher supply, which can either balance or outweigh the demand, depending on the number of pending properties in the market. This relationship between active and pending properties is crucial for understanding the overall health of the real estate market.

How is the Activity Index Calculated

The total of active and pending properties gives a comprehensive view of the market by combining both supply and demand factors. This total is used as the denominator in the Activity Index calculation, providing context to the pending properties. By looking at the proportion of the entire market that is actively being absorbed (pending) versus remaining available (active), real estate professionals and their clients can gain a deeper understanding of market conditions.
For example, if there are 30 pending properties and 70 active properties in a market, the total would be 100 properties. The Activity Index would be calculated as 30 divided by 100, resulting in an index of 30%. This percentage is then used to gauge the market's activity level. An Activity Index above 50% indicates a sellers' market, where properties are selling quickly, often leading to multiple offers and rising prices. This is typically a sign of strong demand relative to supply. On the other hand, an Activity Index between 25% and 50% suggests a balanced market, where supply and demand are relatively even. In this type of market, both buyers and sellers have equal negotiating power, and prices tend to remain stable.
When the Activity Index falls below 25%, it indicates a buyers' market. In this scenario, sales are slower, and there is more inventory available, which can lead to declining prices as sellers compete for fewer buyers. An index below 10% points to a very slow or cold market, where properties may stay on the market for extended periods, and sellers may need to lower prices to attract buyers.

Why the Activity Index is Important

Understanding the Activity Index is crucial for anyone involved in real estate transactions. By analyzing this metric, both buyers and sellers can make more informed decisions regarding pricing, timing, and negotiation strategies. Whether the market is hot, balanced, or cooling, the Activity Index provides a clear picture of current conditions, helping stakeholders navigate the complexities of the real estate market.