How to Use the Absorption Rates in Your Lake Tahoe Real Estate Blog

What are absorption rates... and why are they the best indicators of Market Performance?

As it relates to your South Lake Tahoe Real Estate market, we first heard the term “absorption rates” in a class to earn our Certified Residential Specialist designation (CRS).  We thought it must be something very complicated. You know one of those tedious to learn, intellectual kind of things, straight out of egghead world. But we were wrong. Perhaps wordy, and nothing more than that, “absorption rates” are very simple and immediate to understand and appreciate.

Definition:
“Absorption Rates” means the average number of homes sold per month over a particular period of time. That’s it, and there is nothing more complex about it.

How Absorption Rates are figured out:
We could have used the word “calculated” instead of “figured out”, but that might have suggested higher math, which always seems to create a mental barrier for us marketing types. The only math used to figure out absorption rates is division, and it is purely elementary school stuff.

Here’s the math: to determine absorption rates, the number of homes sold is divided by the number of months.

And here are some examples that will bring “Absorption Rates” all together for you:

• If 12 homes sell in 6 months, the monthly absorption rate is 2. (12 divided by 6)
• If 24 homes sell in 6 months, the monthly absorption rate is 4. (24 divided by 6)
• If 12 homes sell in 1 year, the monthly absorption rate is 1. (12 divided by 12)
• If 24 homes sell in 1 year, the monthly absorption rate is 2. (24 divided by 12)
• If 24 homes sell in 90 days, the monthly absorption rate is 8. (24 divided by 3)

Inventory or "Inventory Depletion": (definition)
What, another egghead term? Hardly, “Inventory Depletion” is just a fancy way of saying “how long it will take the homes that are on the market to sell”. (We think it’s a term for egghead wannabees.) The concept of “inventory” or “inventory depletion” is part of how we present absorption rates. It too is figured out by elementary division.

Here’s the Math: to determine how how long it will take the homes that are on the market to sell, the number of homes on the market is divided by the monthly absorption rate.

And here are some examples that will bring “Inventory Depletion” all together for you:

• If there are 12 homes on the market, and the monthly absorption rate is 2, there are 6 months of inventory. In other words, it will take 6 months to sell these 12 houses at the rate of current market performance.

• If there are 24 homes on the market, and the monthly absorption rate is 6, there are 4 months of inventory. In other words, it will take 4 months to sell these 24 houses at the rate of current market performance.

• If there are 24 homes on the market, and the monthly absorption rate is 2, there are 12 months of inventory. In other words, it will take a year to sell these 24 houses at the rate of current market performance.

What constitutes a Buyers Market, a Sellers Market and a Neutral Market?
The amount of inventory determines market sway. A “Neutral Market” is 6 months of inventory. Anything less than that is a “Sellers Market”, and conversely, an inventory of more than 6 months is a “Buyers Market.”

In the “Inventory” examples above, the first one is an example of a “Neutral Market”. (6 months of inventory). The second example is a “Sellers Market”. (4 months of inventory) The last example is one of a “Buyers Market”. (12 months of inventory)

Two Ways to Look at Absorption Rates:
Absorption Rates are the best means of tracking market performance. They are usually used to indicate “overall market performance”, or how an entire market is doing. Absorption Rates are also used to indicate market performance by price range, or how a particular point in a market is doing.

Your Overall Market Performance Absorption Rates: How to find them.

To get to your overall market performance Absorption Rate Home Page:

• Click on the link in our left sidebar circled in red: “Absorption Rates - Last 365 Days”.

• There is another link in the left sidebar below for Stateline, NV Absoption Rates as well.

The Absorption Rate Home Page:

There are three functions you will find here:

• The Absorption Rate Home Page is a spreadsheet of market performance for the last 365 days.

• Circled in yellow are navigation buttons leading to market performance spreadsheets for the last 180 days; the last 90 days and the last 30 days.

• Circled in red is the link leading to your overall market performance Absorption Rate Chart.

 The Absorption Rate Chart:

The chart is a summary of overall market performance for the last 365 days, and the last 6 months, and the last 3 months and the last 30 days.

• Total Number Homes on Mkt: This is the total number of homes to become available on the market in the last year, 6 months, 90 and 30 days.

• Number Homes Sold: This is the total number of homes sold in the last year, 6 months, 90 and 30 days.

• Monthly Absorption Rate: This is the average number of homes sold per month in the last year, 6 months, 90 and 30 days.

• Current Homes Listed: The number of active listings on the market (as of the date at the bottom of the chart window).

• Current Months of Inventory: This is the amount of time it will take for all of the homes on the market to sell at the current monthly absorption rate.

• Sell Odds in this time frame: This is the odds of a house selling in the next year, 6 months, 90 and 30 days based on current inventory and current monthly absorption rates.

Absorption Rates by Price Range:

This is an example of the Absorption Rate Home page for South Lake Tahoe, CA  for the last year (365 calendar days):

• Price Range: Note that price is displayed in market segments in a range of $50,000.

• No Homes Sold: This is the total number of homes sold in each price range in the last year.

• Monthly Absorption Rate: This is the average number of homes sold per month in each price range in the last year.

• No Homes Currently on Market: The number of active listings on the market in each price range.

• No Months to Sell Current Inventory: This is the amount of time it will take for all of the homes in each price range to sell at the current monthly absorption rate of that particular price range.

Three Observations from this example: (or how to interpret and translate absorption rate information)

• Homes priced between $300K - $349K:
  
  • There have been 53 sales this year.
  • The market is buying 4.4 homes in this price range a month.
  • There are 30 homes on the market in this example in this price range.
  • It will take 6.8 months to sell all the homes in this price range (at current absorption rates).
  • It is a Neutral Market in this price range (6 months of inventory).

• Homes priced between $350K - $399K:
  
  • There have been 53 sales this year.
  • The market is buying 4.4 homes in this price range a month.
  • There are 53 homes on the market in this example in this price range.
  • It will take a year to sell all the homes in this price range (at current absorption rates).
  • It is a Buyers Market in this price range, and an advantage to the Buyer. (more than 6 months of inventory).

• Homes priced between $400K - $449K:
  
  • There have been 63 sales this year.
  • The market is buying 5.3 homes in this price range a month.
  • There are 71 homes on the market in this example in this price range.
  • It will take more than a year to sell all the homes in this price range (at current absorption rates).
  • It is a Buyers Market in this price range, and an advantage to the Buyer. (more than 6 months of inventory).

 Pricing Magic: How to use absorption rates to best price your home.

• Homes priced between $300K - $349K: (lets use the same example as above, though this applies to all price ranges)
  
  • Understand the number of homes that will be sold in one month, in this case it's 4.
  • The idea is to position your house so it is more attractive than the other homes to Buyers looking in this price range.
  • If you have a time frame of 3 months, your home must be among the top 12 most attractive homes in this price range.
  • If you have a time frame of 1 month, your home must be the most attractively priced home in its price range.
  • Often it is necessary to price your home in the next range below, particularly if time is important , and also if it is a Buyer's market, which means that inventories are high... and there are a lot of choices to tempt a Buyer away from you.

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