Home Sellers - Do You Know Your Community Absorption Rate?

While there has been a slow down in the national, regional and local residential re-sale market, there has been an increase in frustration among home owners who are wondering "when is my home going to sell?".   This is to be expected.   Our advice, as a company, is to  "price your home right".  So what is the "right" price?  The "right" price is ultimately your, the home seller's, decision.  However, it is the job of your REALTOR to facilitate the pricing decision by providing you with expert advice. Such advice is drawn from an in-depth market analysis on comparable sales as well as an accurate "absorption rate" analysis.   The worst thing a REALTOR can do is to over promise and under-deliver.  

Our goal as a company is to provide expert advice and facilitate reasonable expectations for our customers when pricing your home to sell.  Once the price is set, our REALTORS focus on creative marketing strategies to sell your home and then, once a buyer is engaged, provide you with skilled negotiating skills to close the sale.

When I have mentioned "absorption rate" to people in the community, I tend to get a puzzled look.  If you are listing your home and have yet to receive an absorption rate analysis, please ask your REALTOR to provide you with this analysis.    

To facilitate your understanding of absorption rate analysis, I am providing you with the following explanation:

Absorption Rate Pricing

"There are only a certain number of houses that will sell in any market
in any given period of time.
Let's see if your house will be one of them."

If 12 homes sold in the last 12 months in a given market that means that the market will absorb 1 house per month on average.  If there are 10 homes currently on the market there is a 10 month supply.  A 6 month supply is a balanced market, less is a sellers market and more is a buyers market. 

How to Calculate Absorption Rate: 

1.    Find your search area, criteria, price range, target market segment, time for analysis

     a.     The longer the time the better the overall average

     b.    Shorter times give the latest trends

     c.     Detailed searches give more accurate results

2.    How many closed transactions occurred in last 12/6/3 months?

     a.     Your REALTOR researches this from the the MLS

     b.    Houses not sides (buy side or sell side) of transactions

3.    Divide the total closed by the time period.

     a.     # homes closed in the last 12 months

          •·        #/12 = # of homes closing on average per month       

     b.     # homes closed in the last 6 months

          •·        # / 6 = # per month over the last 6 months

4.    How many active homes are on the market at this time?

5.    Divide the number of active listings by the average sold per month

     a.     # active for sale / # average closed per month = # month supply of houses

6.    6 month supply is a balanced market,

     a.     less than 6 month supply is not enough houses to fill demand

     b.    more than 6 months supply is not enough buyers to purchase the supply

Absorption Rate Models and Trends Analysis

Example City:

••Sold homes in last 12 months:              10,938

••Monthly Absorption Rate:                      911

••Number of homes on the market:          8,326

••Months Supply on the market:               9

 Is it a Buyers or Sellers Market?

Example City - 6 Month Market Trend
 

••Sold homes in last 6 months                    5,891

••Monthly Absorption Rate                             981

••Number of homes on the market               8,326

 ••Months Supply on the market                      8.5

Example City - 3 Month Market Trend
 

••Sold homes in last 3 months                    3,286

••Monthly Absorption Rate                          1,095

••Number of homes on the market              8,326

••Months Supply on the market                     7.6

What is the market doing?

Pricing Questions You and Your REALTOR Should Discuss

What is my pricing strategy? 

How long am I willing to wait for home to sell?

What is the price range for this house?

Where should this house be priced?

Where will we be "in line" to get this house sold in the time frame expected?

What are the potential pricing objections buyers may have?

What is my walk away price?

I hope you have found this explanation of absorption rate helpful.  Please discuss with your REALTOR if you have yet to receive this type of information.