What is an Absorption Rate? The absorption rate in the real estate market is used to evaluate the rate at which available homes are sold in a specific market during a given time period. It is calculated by dividing the number of homes sold in the specified time period by the total number of available homes in that same niche. When I work with the absorption rate, I don’t actually use a rate. I want to understand the availability of inventory. How fast is the inventory being sold? That is what I want to understand.
First, decide what neighborhood, town, zip code or other niche you are determining the rate for? Are you looking at a whole town, a school district or possibly even a portion of a large neighborhood. The subject market you are considering is defined how you define it.
For example, an agent can define a market as everything in a certain zip code from $400,000 to $500,000. The same zip code in the $1 million to $2 million range could have a completely different absorption rate. Just because there is no inventory in one niche, doesn’t mean every niche is experiencing the same situation.
I like to use an example of a large neighborhood in my town. It has price ranges that vary, so I choose the groupings that go together using size and price.
Let’s use this fictitious example.
In the Jones Elementary school district, in the $350,000 to $450,00 price range, 60 houses have closed in the last 6 months. So, on average, 10 houses have sold per month. Looking at the current inventory, we see 8 houses that are under contract and moving towards closing. We consider that as verifying the trend. It appears to be similar to what has been seen. And there are 5 houses on the market that are for sale. That would be approximately 2 weeks worth of available inventory. With that small amount of inventory, the best houses will sell very quickly. And if one of them has been on the market for 60 days, the market has rejected something about that house – the location/condition/price combination has not appealed to the buyers. You can read more about that here.
Consider the same school district, which has a median price point of $400,000. The homes that are priced from $800,000 to $1 million. It has 20 houses that have sold in the same 6 months, thus selling 3+ houses per month. Builders are building a lot of homes in that price range and there are 38 houses available now in that price range. With only 3-4 houses selling per month, there is 9 months to a year’s worth of inventory available. You have a strong seller’s market in the lower price point, and a definite buyer’s market in the higher price point. And that is in the same school zone at the same time.
How can you use this in your work?
Sellers want to know how long it will take to sell their house. This is very market specific with attention to location, condition and price. The absorption rate will give them a tangible idea of when it should sell in current conditions. This data used with the location, condition and price conversation can be used to set expectations honestly with a seller.
Buyers use this information to help them understand the market and how they need to be prepared to negotiate from a position of strength. How they approach a seller with an offer is very market specific.
Use good data when talking with your clients. Data is available everywhere and we need to use it as well. One of Monica’s Mottos is “Show, Don’t Tell”.