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Absorption Rate - Homeowners Must Understand This

A key ingredient in determining the value of a home in the Tallahassee real estate market, or any real estate market for that matter, is understanding absorption rate and how it is measured.

We define an absorption rate as an estimate of the rate at which homes will be sold each year. This is a critical piece of information that is needed to understand how the inventory of available housing effects the sale of a particular home type in the Tallahassee real estate market. The “math” behind determining the absorption rate of homes in any particular market is relatively easy.

We calculate absorption rate as the average number of homes selling each month and use this to determine the amount of supply currently on the market. We measure months of supply as [The Number of Homes Currently on the market] ÷ [The Average Number of Homes Sold each month in the past 12 Months]

Taking a look at the residential absorption rate in the Tallahassee real estate market (all counties surrounding Tallahassee), we find that there are 4,799 residential units on the market (single family detached homes, condominiums, and townhouses) with twelve months sales total 3,903 homes means that the residential absorption rate is roughly 325 homes per month. We can use this information to determine the “Months of Supply” of homes in the Tallahassee real estate market.

4,799 homes currently on the market
3,903 homes sold in the past 12 months
325 homes on average sold each month

4,799 ÷ 325 = 14.8 Months Supply of homes in inventory.

If you would like more information on how inventory levels are moving in the Tallahassee real estate market, check out our Leon County Real Estate Market Report on the Tallahassee Real Estate Web Site ! It is updated several times per week and shows what inventories are doing currently.

If you like this Article then please subscribe to my blog by Email. You will be able to stay informed about the happenings in the Tallahassee Real Estate Market. You can also subscribe through a full RSS feed.

Joe Manausa is the Broker and Co-Owner of Century 21 First Realty. He can be reached by clicking on the comments button below, via e-mail through his company website at www.manausa.com, or by calling (850) 386-2001.

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Posted by Joe Manausa - Tallahassee Real Estate on 04/16/2008 06:02 AM

Comments (22)

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Originally posted at: Tallahassee Real Estate: Absorption Rate - Homeowners Must Understand This

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22 Comments on Absorption Rate - Homeowners Must Understand This

APR

2008

A lot of people love this information. Many cities in the Metro Detroit area have the same issue

Joe good information thank you for the post. I hope that your market starts to pickup down there.

Don R.

I always use this type of graph when presenting a CMA. It is a great educational tool.

Thanks Russ. I think most cities in the US are facing low absorption rates right now.

Thanks Don, we are vigilantly watching for the bottom (so we can find the recovery).

Good post. Thanks.

Thanks Lin. I'm hoping our agents will use it as well, both graphically and conversationally, in their listing presentation.

Very, very, true and a very helpful and a necessary tool in listing a home right. Thank you for the info, great blog!!!

Gary Love

Thanks Dennis.

Thanks Gary. It's a tool I like to stay familiar with.

Joe, this is a very good and well written post explaining absorption rates.

Thank you Debra.

The only problem with absorption rates is that in the last year the financing components changed. We paint a clody picture if the bas of sales we use teh previous full years sales! No more Alt-A, and the difficulty to obtain a loan with less than perfect credit have redefined home sales. So the numbers we were able to absorb last year may be unobtainable. It is like doing a CMA and using all of last years sales instead of the most recent sales that show a different trend.

I absolutely agree Jim. If your market is growing or receding, this snapshot has limited value. But if you take this snapshot on a monthly basis, with your trailing 12 months moving forward, then it provides fantastic value. In doing so, I have shown our inventory growing (in terms of months of supply) while some other reporting agencies have been announcing our inventories are falling (gross numbers of units versus months of inventory).

Jim: I'm also a big believer in explaining the Absorportion Rate to both buyers and sellers. I have an excel spreadsheet that I've do for different MLS areas. I've found that it is a great tool.

I agree Kathy. I'll be doing a follow-up post to this one and will have a county-by-price-range view of our Absorption rate in Tallahassee.

Joe,

Great post. I love using the "absorption rate", however, I think it is important to emphasize that "absorption rate" can be drilled down to specific sub-divisions or areas. Tallahassee absorption rate is a great example to begin a conversation, but we all know that not all price ranges and areas are getting the same response from buyers.

thanks,

Dave

Thanks Dave. You're right, that is why we publish our price range report each month, by area, so that we can tell what areas are hot, and what areas are not....

Very good information Joe, as always. Jim, I like your comment about some of the things that may be impacting the market and certainly financing is playing an increasing roll, almost on a daily basis.

When dealing with sellers,it sometimes becomes so difficult to explain why their home should be priced a certain way in order for them to achieve their goals. You show them comps, give them the best pricing presentation you can come up with and at times, they still don't get it. Knowing absorption rates and the months supply of inventory within a property type,location and price range serves as a great tool to paint the picture and truly drive home your point. Great Post!

Thank Joe. I'm hoping with today's incredibly low rates, we'll see absorption rates start to rise again.

Joe,

Love the post! Carol makes a great point. Sellers seem to realize that the time their house will be on the market has increased, but they don't have a real idea how severe the wait can be if their home isn't priced aggressively. Most sellers still seem to think that 4 months is a long time for an average priced house to sit on the market. They are floored when you show them it could be over a year! This information really helps in the pricing presentations.

Thanks Carol. I think if a seller is serious, then they will be receptive to a well-explained opinion on absorption rate.

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