What is an Absorption Rate and How Does It Affect You?

I would add that it is best to do 3 month, 6 month and 12 month absorption rates, as they can vary wildly.

For those who asked, absorption rates are very simple to calculate.  (And it is not a stagnant number,  it will change with homes listed, and homes removed from the market).  At best, it is a "snapshot in time", and is helpful for showing trends.

For a 6 month absorption rate, first, look at the history of homes that have CLOSED in the past 6 months.  If you have 12 closed, you have an average of 2 per month.

Then, look at the number of ACTIVES on the market.  If you have 16 active homes, you will have an absorption rate of 8.  (Actives divided by 2).  It merely means that history has shown that the area closes an average of 2 homes per month.  Taking that average, you can fomulate an educated guess as to how long it might deplete the current inventory of what is currently active.  

It helps to use absorption rate positioning in your listing presentation.  If the rate is 8, and they want to sell quickly, they simply have to be #1 or #2 in the options available in their area.  This can be accomplished in part, by pricing and condition.  

Absorption rate is a trend, not a prediction, and a rate of 8 months doesn't mean it will take 8 months for that particular home to sell.  That is where the aforementioned absorption rate positioning comes in.  

 

 

I couldn't have explained it better. I will re-blog.

Great feature topic Leesa and so well explained. Many areas of the country absorption rates have soared. Texas being backwards of everywhere else all the time we have seen ours come down as so many of our over flooded new home builders have gone out of business.

There was no mention of paper towels in this article. I should be confused, shouldn't I? =)

Leesa - Great explanation.  I use absorption rates in my market reports and stress that a rate has to be calculated for the seller's price point.   Calculating, understanding, explaining and using the rate effectively like you do is what puts you way above many others who don't.

Absorption rates are an awesome tools to speak of when doing a listing presentation and I am not sure why everyone does not use them! As for those rates....holy moly I am glad I am not selling around there! Sometimes we complain but yet at the same time we should be thankful for what we have! I might although question this after we get our first foot of snow here this winter!

Leesa:

Very good explanation of absorption rate.  This figure is so important to both buyers and sellers and should be fully explained to them during listing appoints and initial meeting with buyers.

Another reason to price it right. Great explanation on a really important topic.   

Great post about absorption rate Leesa! When I use my charts for this, sellers get it. It's better to explain and show them besides what homes have sold for what in our CMA's.

Congratulations on the feature! This hit my facebook wall!

Leesa, a very nice analysis of how absorption rates relate to the market. I do monthly absorption reports of my market area. This allows a potential buyer or seller at a glance of what the market is doing.

Its a good article for both buyers and sellers to determine the selling price.