Having two small children and several rescue animals I know how important the concept of absorption is- I need highly absorbent paper towel and napkins to clean up all their spills (they inherited their clumsiness from me). I also know that kids absorb information quickly so you need to be careful what you say around them because sometimes they absorb the "wrong" thing.
The concept of "absorption" is even more important in my career as a full time Realtor. Before, I ever put a home on the market I always calculate the absorption rate. Absorption rate is a concept and practice that is often over looked by many Realtors and lack of knowledge can lead to expired listings which everyone know is no good- it hurts the Seller, the Realtor, and can lead to poor sales results in an area.
So what is the absorption rate?
Just like the name applies, the absorption rate is a calculated estimate, based on current and past market trends, that determines how long it will take for Buyers to absorb (aka buy) the current inventory in a given area.
So what does this number tell you?
As a Realtor, I often have Sellers ask me how long I think it will take to sell their house. While I do not have a crystal ball or the ability to see into the future, the absorption rate can allow me to make an educated estimate of how long it will take for a home to sell based on the number of comparable homes on the market and the number of closed homes in a given time period.
The absorption rate follows the simple law of supply and demand. If an market area has 46 similar homes on the market and only 5 comparable home sold the past month that are has a current absorption rate of 9.2 months. In other words there is 9.2 months of inventory. Therefore if a Seller "needed" to sell within 3 months they better make sure that their price and condition were better than that of the competition.
Selling real estate is not about guessing- it is both a science and an art. Because both Jennifer and myself have advanced science degrees we thoroughly research market areas both before and during our listing periods as good knowledge of the market is critical in selling a home and allowing Sellers to get the most money out of their homes and to sell in the shortest period of time.
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Christine/Jennifer,
As an appraiser we now have to provide the 1004MC form with our appraisal that provides all this information. While it is something we have done "behind the scenes" in the past we now have to show this information on the new form. Absorption rates are very importmant when determining market value. We have to not only analyze past sales but also what is currently available for sale and what the subject property has to compete with. Thanks for shining a light on this often overlooked concept.
Great post Christine and Jennifer. I post our local absorption rates monthly on the web and here. These were for May: Condo Absorption Rate and Residential Absorption Rate.
I agree, a valuable yet often overlooked tool! Great post!
Christine and Jennifer,
RE professionals always talk about inventory at a market and national level and often don't realize true sales picture in their own local market. Glad to see you and some others are using the available data and simple economics to list, sell and motivate buyers.
You can actually take absorption one step further and do the same calculations for neighborhoods or regions. When you do this you can identify prospecting zones for your business and concentrate some marketing in these areas to secure listings or present properties to your buyers.
Always give this # when on a listing presentation. Gives the seller what is truly going on in the market which they probably never thought about. Also give the number of homes on the market plus/minus 10K of their listing price. The buyer has 50 homes to choose from between $200 to $220 -why should they choose yours?'
Came back to add this girls: Does Gabe know that it's not considered in good taste to add a link to anything away from your blog? Just wondering!
Tom is right. We appraisers have had to start calculating these on all reports. It was eye opening.
You seem to be a person that "gets it". I have noticed many list prices seeming to have no rhyme or reason. Using this absorbtion rate will help your seller in setting the correct list price.
Great post
I think one key issue is how does the home stand out. Sometimes unique homes either in design, high end, etc will take longer to sell because there is no market or a limited market for the home. Your homes that are middle of the market should be priced to sell, or the client should be explained the cost of setting on the market.
Great blog! As a manager, I show my agents how to calculate and present the absorption rate to their clients for not only initialing pricing homes, but price reductions too!
I include the absorption rate in all of my Market Updates. I use these numbers to teach buyers and sellers about the current market conditions. When you put an absorption rate of 3 years in front of a seller for similar houses in their neighborhood....they have an instant reality check.
We have 18-22 months of inventory by absorption rate in Lake Norman areas. I push these facts to all my sellers. Competitors also set the pricing as well, especially when there aren't many sales.
Hi Christine, Most of us understand the relevance of absorption rates. However, remember that absorption rates are flawed because they only look backward at what the market has done. In that way it tends to underestimate the market going forward and the quickness with which a market can turn around.
Tom- I think the best way to avoid issues with the appraisal is to make sure the house is priced in reality.
Gabe- that is a great idea to post the absorption rates as they can change quite drastically.
Derek- knowing the local market is key to sucessful selling.
Lyn- I always provide this number as well- it is very eye opening.
Chris and Kristi- it does help check you back into reality
I can make the mls sing and dance to spit out absorbtion rates.
Nice job ladies; it's a pleasure to see some professionalism in our business.
Mike- we do this too.
Jim- Thanks that means a lot to us!
Christine and Jennifer, great post. Absorption rates of any real estate market are so important to know and share with our sellers.
Christine and Jennifer,
Great Post. It is definitely a great metric to monitor.
Thanks for sharing,
Matt Naumann
I'm just researching what others are doing with absorption and came across your blog. Your clients hopefully appreciate the extra step you do to show them how to read the market better.