Pricing Realistically - Understanding Absorption Rate in Real Estate

By
Managing Real Estate Broker with Lakeland Real Estate Group, Inc. BK646565

Pricing Realistically - Understanding Absorption Rate in Real Estate

Pricing Realistically - Absorption Rate in Real EstateHousing economists and experts use the absorption rate in real estate to predict the housing market, while sellers may heard the phrase through the media but really don’t know what absorption rate represents. Since April 2009, appraisers are required to use absorption rate for all government loans.

Absorption rate is an assessment of the current housing inventory, including properties under contract (pending) because a prospective buyer can walk at any time, divided by current rate of sales, expressed in months of supply. In any local real estate market, the absorption rate is generally considered the best indicator of whether the housing is either a seller’s or a buyer’s market.

  • Normal Market - Absorption Rate is between 5 and 6 months.
  • Sellers Market - Absorption Rate is lower (1-4 months)
  • Buyers Market - Absorption Rate is higher (7+ months)

To simply define absorption rate in real estate, it is the number of months it will take to sell all homes for sale.  For example a 12 months supply would mean that at the current rate of sales and no additional homes coming on the market, it would take 12 months for the inventory to deplete.

Just like in any industry, supply and demand play an important role.  If the demand is slow coupled with increasing supply will give you lower prices that results in a buyer’s market.  Likewise, if supply is limited, home buyers will typically pay more for the home - seller’s market.  

When it comes to calculating the absorption rate in real estate, it really brings the housing market for sellers and buyers into perspective.  For sellers, it will define the market in how to price the home realistically when comparing their competition with the result of a faster sale. For the buyer, the absorption rate can provide a negotiation tool to obtain a lower price.  

In reality, there is only a certain number of homes that will sell in any given period.  While absorption rate is not an exact science, the key to you selling or buying a home is understanding the local real estate market and trend providing you with a clear vision when it comes to making an informed decision. 

 


I hope you found this post useful! If you need help finding or selling your Lakeland, Florida home, please contact Petra Norris - REALTOR(R) at 863-619-6918. If you’re new to Lakeland, I’d especially like to extend a warm welcome. I value my clients and provide them with honest, reliable service. Allow me to introduce you to the Lakeland FL real estate landscape and all it has to offer.

 

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Copyright © 2010 By Petra Norris * Pricing Realistically - Understanding Absorption Rate in Real Estate*

 

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Re-Blogged 7 times:

Re-Blogged By Re-Blogged At
  1. Kerry Lucasse 12/15/2010 08:11 AM
  2. Michelle Francis 12/15/2010 09:12 AM
  3. Richard Iarossi 12/15/2010 02:13 PM
  4. Linda Graves Arnold 12/15/2010 02:30 PM
  5. Ted Tyrrell 12/15/2010 03:30 PM
  6. Cheryl Ritchie 12/16/2010 02:53 PM
  7. Gabe Sanders 12/20/2010 01:28 AM
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Rainmaker
545,700
Lori Cain
eXp Realty - Tulsa, OK
Midtown Tulsa Real Estate Top Producer

Petra - great post, as usual. Can you share how you prepare an absorption rate?

Dec 15, 2010 03:40 PM #21
Ambassador
2,057,162
Michelle Carr Crowe,Altas Just Call...408-252-8900!
Get Results Team...Just Call (408) 252-8900! . DRE #00901962 . Licensed to Sell since 1985 . Altas Realty - San Jose, CA
Family Helping Families Buy & Sell Homes 40+ Years

Thanks for a clear, easy to understand explanation of absorption rate.

Dec 15, 2010 03:40 PM #22
Rainmaker
544,206
Eric Michael
Remerica Integrity, Realtors®, Northville, MI - Livonia, MI
Metro Detroit Real Estate Professional 734.564.1519

Great explanation. I've been meaning to keep track of this more closely.

Dec 15, 2010 03:47 PM #23
Rainmaker
85,945
Debbie Durkee
Coldwell Banker Select, Realtors -- Tulsa, Oklahoma - Tulsa, OK
ALC, CRS -- Land & Country Estates near Tulsa

Petra -- great explanation.  It's helpful to refer to this information when dealing with sellers.

Dec 15, 2010 03:57 PM #24
Rainmaker
1,838,240
Michael J. Perry
KW Elite - Lancaster, PA
Lancaster, PA Relo Specialist

I have a listing right now where we have 8 others for sale in the development and we're still moving downward.

Dec 15, 2010 06:34 PM #25
Rainmaker
686,759
Hella Mitschke Rothwell
(831) 626-4000 - Honolulu, HI
Hawaii & California Real Estate Broker

In our area REO homes sell pretty fast because they are priced so low. Generally they are not the quality of the non-REO homes which are, of course, priced higher. And the market for them is almost at a standstill. So it seems that we have two kinds of absorption rates.

Dec 15, 2010 07:01 PM #26
Rainer
453,345
Diane M. Phillips Realtor 443-286-4365
Frankly Real Estate Inc. - Manchester, MD
Specializing in Carroll Co., MD

Petra ~ Very well said, important invormation sellers need to understand to price realistically.

Dec 15, 2010 10:29 PM #27
Rainer
332,782
Irene Kennedy Realtor® in Northwestern NJ
Weichert - Lopatcong, NJ

Petra,

In my area, we agents use the term absorption rate but I find others often ask about how many months of inventory.  Same animal - and important to know, as you say!

Dec 15, 2010 11:11 PM #28
Rainmaker
490,543
Lorraine or Loretta Kratz
Crescent Moon Realty, Inc. & Land N Sea Auctions. - San Marcos, CA
Certified Negotiation Consultants

Absorption rate can vary from price point--- here in the San Diego community are absorption rate for any home under $350,000 is much higher than homes that are over $950,000. Then many other factors must weight. Being price right, etc.

As they say it much easier to afford a Honda, then a Mercedes.

Dec 15, 2010 11:45 PM #29
Rainmaker
4,797,386
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate
Great post about a very important statistic that all Realtors should know. It is a great snapshot of what's going on in the local market.
Dec 16, 2010 12:37 AM #30
Rainmaker
269,508
Jean Hedren, CRS ABR SRES RSPS
Edina Realty, Inc. - Gordon, WI
Your Northwest Wisconsin Realtor

Thanks Petra. Clear and concise explanation.

Dec 16, 2010 12:47 AM #31
Ambassador
920,196
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate

Absorption rates are critical when you list a home. It gives sellers a realistic expectation of the market and when I can I drill it down to the neighborhood as some have lower or higher than others.

 

Dec 16, 2010 01:42 AM #32
Rainmaker
709,157
Petra Norris
Lakeland Real Estate Group, Inc. - Lakeland, FL
Realtor, Lakeland FL Homes for Sale

To everyone - Wow I had not expected this kind of a response.  Understanding absorption rates makes us better real estate agents.  Knowing where the market is and where it is going is very important in our profession and to our clients and consumers.  

 

#20 William - Yes, I do use the pending in my absorption rate. 

#21 Lori - Absorption rate is figured by for example:  Let's say you have had 120 sales within the last 12 months and currently there are 150 homes in active/pending.  The calculation is: 120/12= 10   150/10= 15 months of supply. 

Hella - In my overall market reports I do separate absorption rates for traditional sales and distressed. 

Thanks for the reblog to:

Ted Tyrrell

Jim & Linda Arnold

Richard Iarossi

Michelle Francis

Kerry Lucasse

 

Dec 16, 2010 03:15 AM #33
Ambassador
3,112,611
Paul S. Henderson, REALTOR®, CRS
RE/MAX Northwest. - Tacoma, WA
Tacoma Washington Agent/Broker & Market Authority!

Petra, I can't believe how few, in our industry, don't understand absorption rates and pricing.

Dec 16, 2010 05:07 AM #34
Rainmaker
1,365,496
Cheryl Ritchie
RE/MAX Leading Edge www.GoldenResults.com - Huntingtown, MD
Southern Maryland 301-980-7566

This is really, really important to understand. It is not only what your home is worth but what are the odds of selling at the number that you select. I love to look at these stats with Sellers and see the light bulbs go off when they grasp pricing through this lens. The five to ten percent of the Sellers with homes selling in this marketplace grasp the absorption concept.

Dec 16, 2010 02:55 PM #35
Rainmaker
151,214
Eric Anderson
Eric Anderson Realty Group - Fayetteville, NC
Fort Bragg Military Relocation Services, Fayettevi

Absorption rates are critical when determining, price and market saturation.  Great Post...

Dec 16, 2010 02:59 PM #36
Ambassador
2,008,677
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Petra - This is an important concept for consumers to understand.  I also agree with the comment above that absorption rate can be different at different price ranges.

Dec 16, 2010 03:16 PM #37
Rainer
32,640
Patrick Henry
PMZ - Stockton, CA
PMZ

Great explanations. I think a lot of people just use 6 months for everything, but with the market the way it is, it is better to break it down.

Feb 11, 2011 07:03 AM #38
Rainer
37,641
Brad Hornshaw
Brad Hornshaw Realtor Lynnwood, Bothell, Everett - Lynnwood, WA
Realtor, Listing Agent, Buyers Agent, Investments
Hi Petra Great explanation. I think I have also heard this called Inventory..........Brad
Mar 02, 2011 09:33 AM #39
Rainer
37,916
Krista Abshure
Fathom Realty - Fuquay Varina, NC

I always speak to my sellers about the absorption rate for thier home price/ market area.  It amazes me at the number of real estate agents who have no clue what that is or how to figure it out.  Thanks for sharing!

Mar 25, 2011 02:50 AM #40
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