Absorbing and Understanding Absorption Rate

By
Real Estate Broker/Owner with Home Buyers Realty, LLC-Manchester, Bolton. Vernon,Ellington 0788174

 

Absorption Rate is defined, calculated, and formulated in many different methods leading to interpretation variations.

 

It only becomes useful to the clients, prospects, or readers if the data is simple and comprehensible.

 

Giving them a presentation with three decimal places or a number less than one is not easy to comprehend: See the example below that I extracted from a realtor.com website.

 

 

 

 

The example above could have been best presented by dividing 33,163 (Number of Sold Homes) by 304 days, giving a result of 109. This means that the average number of homes sold each day is 109 instead of stating: 1 home is sold every .00917 days.

 

Using the current inventory or number of active homes in the above example of 14,156 and the average sold homes per day of 109, it will take 129.87 or 130 days to deplete the current inventory provided there are no other listings that come up on the market and the current market pace remains the same.

 

 Moreover, there is no short-cut in calculating Absorption Rate.

 

 

 

 

The formula above does not yield a true picture of the time-frame or period to deplete the total inventory of 30,000 units.

 

Why? Just because the number of units sold last month is 4,000, does not necessarily mean that 4,000 units were sold consistently for twelve months.

 

Let’s say that only 3,500 were sold in the first month, 3,000 in the second month, 3,200 in the third month, and 4,000 for each remaining month of the year.

 

The sum of all units sold for twelve months is 45,700 as opposed to 48,000. Divide 45,700 by 52 weeks to get the number of units sold per week. The result is 879 units sold per week. If we divide the current inventory of 30,000 units by 879, we get the number of weeks it will take to sell the 30,000 units, which is 34 weeks. Again, this will change as listings shore up on the market or if the market shifts significantly.

 

Summarily, don't take a short cut to calculate the Absorption Rate. It is better absorbed when correct numbers are pulled and utilized.

 

If you want to use Absorption Rate to explain the market trend more accurately, pull the total number of current listings for one specific town. It would be better if you also set a price range. Then pull the sold homes for a given period. For instance six months. Divide the number of homes sold for six months by six to get the average number of sold homes each month.

 

 

 

Example:

 

Current Inventory: 1233 Homes  (Listing Price: between $100K and $300K)

 

Sold Homes in Six Months: (2/1/2013-7/31/2013): 1380 Homes (Listing Price: between $100K and 300K)

 

Divide 1380 by 6 months to get the average units sold each month: 1380/6=230 units sold each month

 

1233/230= it will take 5.27 months to sell the 1233 homes.

 

In weeks: 1380/26 weeks(6months has 26 weeks)=53.08 units sold each week

1233/53.08=23.23 weeks to sell the 1233 homes.

 I hope this helps you absorb the Absorption Rate.

 

 

 

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Ambassador
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Michelle Carr-Crowe-Top 1% Diamond Certified Real Estate Team Sells Cupertino San Jose Homes-Just Call 408-252-8900
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Absorption rate can be a useful indicator of market health-if the consumer understands what it means.

Sep 04, 2013 02:23 PM #18
Rainer
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Barry Kessler
CENTURY 21 Troop Real Estate - Simi Valley, CA
Barry Kessler

Bookmarked this post. Very informative and easy to follow as well.

Thanks Maria!

Sep 04, 2013 02:32 PM #19
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Jennifer Fivelsdal
JFIVE Home Realty LLC | 845-758-6842|162 Deer Run Rd Red Hook NY 12571 - Rhinebeck, NY
Mid Hudson Valley real estate connection

Maria this is an important calculation since it gives an indication of the type of market, selelr's, buyer's or normal.

Sep 04, 2013 02:35 PM #20
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Jeff Dowler
Solutions Real Estate - Carlsbad, CA
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Maria

As you point out the important thing for buyers and sellers is to explain the data in the local market in a way that they can understand, and realize what this means in terms of buying and selling. Data can be pretty easy to manipulate, or present in various ways that are more, or less, meaningful. Your examples point that out.

Jeff

Sep 04, 2013 03:20 PM #21
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Richard Iarossi
Coldwell Banker Residential Brokerage - Crofton, MD
Crofton MD Real Estate, Annapolis MD Real Estate

Maria,

Done correctly, absorption rates are one of the most effective statistics to share with a seller or buyer.

Rich

Sep 04, 2013 06:01 PM #22
Rainmaker
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Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Being a math guy, you numbers make good sense. Absorption rates are different everywhere as you well know, so they would have to be adjusted to make sense locally.

Sep 04, 2013 08:03 PM #23
Rainer
240,103
Jesse Skolkin
Independent New York State Certified Real Estate Appraiser - Fresh Meadows, NY

Fannie Mae's explanation of the absorption rate:

How is the absorption rate determined?

The absorption rate is determined by dividing the total number of sales for a given market by the time period being analyzed. Example:

If there were 60 sales during the 6-month time period being analyzed, the absorption rate would be 10 sales per month (60 divided by 6). If there are 240 active listings there would be a 24 month supply of homes on the market (240 divided by 10).

 

Sep 04, 2013 09:24 PM #24
Rainmaker
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Jeanne Dufort
Coldwell Banker Lake Country - Madison, GA
Madison and Lake Oconee GA

Breaking it down to one town or community, and a specific price range, is critical to having a statistic that may actually be relevant to your seller or buyer.  Good post.

Sep 04, 2013 09:28 PM #25
Rainmaker
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Elisa Bruno-Midili, NYS Licensed Associate Real Estate Broker
Cafe Realty - Mount Kisco, NY
Cafe Realty 914.230.0650

I am able to understand however a less detailed client would be confused. I try to explain it simply.

Thanks!

Sep 04, 2013 09:35 PM #26
Rainer
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Keith Lawrence
RE/MAX Properties - Mahwah, NJ
ABR, CDPE, SFR, 203K Specialist

Good lesson on absorption rate.  Thanks for the tip.

Sep 04, 2013 10:17 PM #27
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Harry F. D'Elia
Real Estate and Beyond, LLC - Phoenix, AZ
Investor , Mentor, GRI, Radio, CIPS, REOs, ABR

Yes, it is good to know the absorption rate in your local real estate market. Inventory is the key

Sep 04, 2013 10:25 PM #28
Rainmaker
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Jennifer Mackay
Keller Williams Success Realty - Panama City, FL
Your Bay County Florida Realtor 850.774.6582

Absorption rate is and often misunderstood yet invaluable calculation - specially in dealing with investors.

Thanks for sharing

Sep 04, 2013 11:05 PM #29
Rainmaker
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Michael Setunsky
Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Maria, Absorption Rates are a good indicator of market trends for a given period of time ( e.g., 365, 180, 90 and 30 days). It also trends the stability of a market such as neutral, buyers or sellers market determined by the available month's supply versus the number of properties sold. Good Post!

Sep 04, 2013 11:20 PM #30
Rainmaker
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Kim Peasley-Parker
AgentOwned Realty, Heritage Group, Inc. - Sumter, SC

Very good explanation of the Absorption Rate and how it is calculated.

 

 

Sep 04, 2013 11:50 PM #31
Rainmaker
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Jeffrey Stevens
Berkshire Hathaway HomeServices New Mexico Properties - Las Cruces, NM
Jeffrey Stevens Realtor®/Associate Broker

Thank you for "dumbing it down" for everyone. Great post!

Sep 05, 2013 12:12 AM #32
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Bryan Robertson
Intero Real Estate - Los Altos, CA
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Very glad you spelled this out and put all the math up so people can truly understand it.  Knowing the real absorbtion rate is critical as a low number indicates a strong sellers market versus a high number indicates a strong buyers market.  Knowing the difference is key when pricing or making offers.

Sep 05, 2013 12:31 AM #33
Rainer
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Laurie Martinez
Berkshire Hathaway HomeServices California Properties - Dana Point, CA
South Orange County Real Estate
Thank you for the clear explanation. I have always understood it generally but I am more comfortable discussing something when I thoroughly know it.
Sep 05, 2013 12:34 AM #34
Rainmaker
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John T. Dowd
United Country Dowd & Forbes Realty - Edenton, NC
Integrity - Service - Experience

Thank you

Sep 05, 2013 12:39 AM #35
Rainmaker
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Maria Gilda Racelis
Home Buyers Realty, LLC-Manchester, Bolton. Vernon,Ellington - Manchester, CT
Home Ownership is w/in Reach. We Make it Happen!

Good Afternoon Everyone: Thank you very much for sharing your time to post your comments. I am glad that it shed some light to others.

I wish I can answer each and every posting--- . To express my gratitude, I thank you ALL.... 

Sep 05, 2013 08:12 AM #36
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Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
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Maria - I think it's good to look at absorption rate over different periods of time.

Sep 05, 2013 04:23 PM #37
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Maria Gilda Racelis

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