market absorption [mahr-kit ab-sawrp-shuh n] - noun.
What is market absorption, and what does it mean to you as a real estate professional? If you are not calculating market absorption for each of your listing presentations, it is my hope that after reading the information below, you will.
The Basics
The market absorption rate is number calculated by real estate professionals to establish the relationship between supply and demand in a particular market, and sometimes within a specific price range for that given market. Used in conjunction with other pricing tools, the market absorption rate is an objective statistic that estimates the number of months it will take for the current market inventory to turn (using current market conditions as a given). The calculation to determine the Absorption Rate is:
# Of Current Active Listings
# Of Reported Sales For The Last 30 Days
An absorption Rate of 5-7 is considered a normal market. Less than 5 is a sellers market and more than 7 is a buyers market.
Normal Market - In a normal market there is a 5-7 month supply of homes. A normal market has a balanced level of inventory where the market is not leaning in either the seller's or buyer's favor.
Seller's Market - In a seller's market there is less than 5 months supply of homes. Since there are fewer homes to choose from, sellers are in control and buyers have to be willing to pay top dollar to get the home that they want. Multiple offers are often the norm in a seller's market.
Buyer's Market - In a buyer's market there is more than 6 months supply of homes. Buyer's are in control since there are so many homes from which to choose from. Sellers often have to give an incentive (pay for closing costs or pay for repairs) to buyer's to buy their home.
Putting the Absorption Rate to Work
It's useful to analyze the market absorption rates for the market as a whole (i.e. for all single family homes in a given community) and then narrow it down to look at the market absorption for homes in a given price range or other variable to get a better understanding of the current market in order to help sellers properly position their home for the current market conditions.
An in-depth comparative market analysis when performed in conjunction with calculating the market absorption rate and looking at other key information about the seller's property- style, location, condition, special features, amenities, etc.-will now establish a clearer picture of market conditions as they apply specifically to a seller's property.
Although, you may feel that a comparative market analysis or price trend analysis supports a specific price range for your client's home. That range may not be appropriate. When adding market absorption rates to the analysis, you may find that there are too many or too few homes priced at the same level. This additional information may lead you to suggest a different pricing strategy for your client.
A real estate professional may also want to obtain a more macro (or focused) picture of how market conditions (absorption rates) in the listing area-and in areas adjacent to it or nearby, and in towns that are close by, but with similar characteristics-compare with those in the market generally. Very often, they are quite different.
These tools will help the real estate professional and the seller properly price the property, devise the best strategy to market it, and can even predict the odds of selling the property within a given time frame.
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Amber,
Great explanation of the absorption rate! I am going to create a link to this post from my latest post so that hopefully more members will get to read this. The absorption rate is an excellent tool to help clients understand what is happening in a specific market and more real estate agents should be looking at providing this information along with current inventory and recent sales.