What is this "Absorption Rate" thing anyway and how can I make sense of the data for my clients? Read on...
Recent blogs on absorption rate prompted me to share my own experience with this market parameter. Absorption rate can best be thought of as the number of months it would take to sell all existing inventory based on current monthly rate of sales. If no new listings were to come on the market, that is how many months would be required before the inventory was depleted. I was introduced to absorption rate by a short but terrific article in the July 17, 2006 issue of Business Week entitled "Tips for Selling in a Changing Market" written by Chris Palmeri. Of special value in that article was the author's characterization of bounds as "fine", "okay", "troublesome", and "not pretty". It's always better to quote an outside authority than to try to characterize such things yourself. I researched the Kauai market via our multiple list service and then created a column chart with color bands to show what was healthy and what was not (see the illustration below). The color bands allow immediate interpretation as to health of each region of Kauai without struggling with exactly what the term absorption rate means. In my case, I decided to show single family residential and condominiums separately. One could also show it by price bands or whatever parameter you deem important.
Hope this is helpful in understanding absorption rate and how to make the data meaningful. Let me know if you need tips on how to create the color bands in an Excel chart.
Special thanks to Sandi Bauman who got me thinking about this earlier today.
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