What is Absorption Rate and Why is it Important?

By
Real Estate Broker/Owner with Franklin Homes Realty LLC

A question I often get asked? What is Absorption Rate and why is it important?

The simplest definition of absorption rate is the rate at whichWhat is Absorption Rate and Why is it Important? properties are sold in a given area. For example, there are currently 845 single-family homes for sale in Franklin TN. During December (the most recent month of closed data), 95 homes closed in Franklin.

If you take the current inventory of 845 homes and divide that by last month's closed sales (845/95), you get 8.9 months. That means if the current inventory stayed the same and the rate of closed sales remained the same, it would take 8.9 months to deplete or sell the existing homes.

A normal market would be considered between 5 - 6 months of inventory. If there is 1 - 4 months of inventory, it is considered a seller's market. If there is more than 7 months of inventory, then it is considered a buyer's market. Based on the most recent data, Franklin TN is in a buyer's market.

Remember, absorption rate is constantly changing as new homes come on the market and existing homes sell.

Why is it important to know the absorption rate?

If you are looking to sell your Franklin TN home the absorption rate will help you determine where you should price it for a quick sale. For example, say you are thinking about pricing your home at $450,000 and you calculated the absorption rate for homes priced between $450,000 - $500,000 was 14.3 months. But homes priced between $400,000 - $449,000 had an absorption rate of 5.3 months. If you were looking for a quick sale, you might price under $449,000. However, if you weren't in a hurry and were prepared to wait, you might price over $450,000.

If you are looking to buy a Franklin TN home, knowing absorption rate may help you negotiate a better deal. Let's say you are looking at two homes. One is in Sullivan Farms with an absorption rate of 6 months. While the other is located in Fieldstone Farms with an absorption rate of 12.1 months. You may decide to purchase the home in Fieldstone Farms because the seller may be more negotiable on his price because inventory is moving slower there.

Absorption rate is an important indicator of what is going on in your market and should not be overlooked. As in the examples above, the absorption rate can vary from city to city, neighborhood to neighborhood and even from one price range to another.

If you are looking to sell a Franklin TN home or buy a Franklin TN home, contact Tammie White of Franklin Homes Realty LLC at (615) 495-0752 for the most recent absorption rate to aid you in the sale or purchase of your home.

Copyright © 2011 By Tammie White, All Rights Reserved.*What is Absorption Rate and Why is it Important?*

Posted by
Tammie White, Managing Broker/Owner
CLHMS, CRS, GRI, SFR
Franklin Homes Realty LLC
Franklin, TN
(615) 495-0752 
GET REAL. GET LOCAL.
 
This posting with the content written here and photographs displayed are the intellectual property and opinions of Tammie White of Franklin Homes Realty LLC. Any party who uses this material without the written permission of Tammie White is subject to copyright infringement and possible lawsuit.
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Re-Blogged 7 times:

Re-Blogged By Re-Blogged At
  1. Bill Burchard 01/30/2011 03:01 AM
  2. Barbara Martino-Sliva, Top Producer 01/30/2011 03:12 AM
  3. Dorie Dillard CRS GRI ABR 01/30/2011 04:57 AM
  4. Richard Iarossi 01/30/2011 07:22 AM
  5. Billie Hillier 01/30/2011 07:47 AM
  6. Lori Cain 01/30/2011 05:08 PM
  7. House Sale Advisors Lancaster and Lebanon Counties PA 01/31/2011 09:56 AM
Topic:
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Location:
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Rainmaker
125,450
Mary Ann Daniell Realtor
Coldwell Banker United, Realtors - Subsidiary of NRT LLC - Killeen, TX
Delivering Successful Results Since 1999

Great information written so consumers can understand it.   This statistic is often made harder to understand than it should be.   Congratulations on your feature!

Jan 30, 2011 12:16 PM #48
Rainmaker
662,099
Patricia Aulson
BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate - Exeter, NH
Realtor - Portsmouth NH Homes-Hampton NH Homes

Well put in your post today.  Thank you for getting this out to us today.

I enjoyed the read.

 

Patricia/Seacoast NH & ME

Jan 30, 2011 12:21 PM #49
Ambassador
1,704,260
Tammie White, Broker
Franklin Homes Realty LLC - Franklin, TN
Franklin TN Homes for Sale

Jason - I hope so too.

Bryan - I'm with you on this. I'm surprised at the number of agents that don't even know how to calculate this number.

Lola - Absolutely.

Dianne - How do you do that?

Maya - That's why I use it. Then they know ahead of time what are chances are of selling in their timeframe.

Valerie - We are actually in a seller's market in some neighborhoods here. Of course, when I tell people that they look at me like I don't know what I'm talking about. I just point to the stats. That's the beauty of this calculation.

Debe - I'm going to put this info on my website as well. It's definitely not something that buyers and sellers see on every site. I want to be the go to source in our area.

Mary Ann - If they can't understand it, then it will be of no use to them. So we have to make them understand it. The best way to do that is give examples.

Patricia - Thanks for stopping by.

 

Jan 30, 2011 12:38 PM #50
Rainmaker
255,615
Kristi DeFazio
RE/MAX Advantage - Colorado Springs, CO
Colorado Springs Rea lEstate 719-459-5468

OUr absorbtion rate here varies greatly depending on price range. It would be considered a buyer's market about about $200,000 and a seller's market below that. Thanks for the explanation.

Jan 30, 2011 01:40 PM #51
Ambassador
1,704,260
Tammie White, Broker
Franklin Homes Realty LLC - Franklin, TN
Franklin TN Homes for Sale

Kristi - It is important to explain to sellers that this number varies depending on the price and the area.

Jan 30, 2011 02:00 PM #52
Ambassador
2,010,472
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Tammie - This is a great, easy to follow explanation of absorption rate, and even better, explains why it's important.

Jan 30, 2011 03:02 PM #53
Ambassador
1,704,260
Tammie White, Broker
Franklin Homes Realty LLC - Franklin, TN
Franklin TN Homes for Sale

Christine - Why have a number if you don't know it's application?

Jan 30, 2011 03:09 PM #54
Rainmaker
254,484
Pam Jank
Coldwell Banker Schneidmiller Realty - Coeur d'Alene, ID
Your Coeur d'Alene & North Idaho Real Estate Pro

Christine,  Great post.  I also give my clients the absorption rates.  Your post isan excellent explanation.

Jan 30, 2011 04:19 PM #55
Rainmaker
484,178
Cindy Westfall
Premiere Property Group,LLC Portland Metro & Suburbs Oregon - Tualatin, OR
ABR,GRI Your Tualatin & Portland Metro Real Estate

Hi Tammie, wow, loved this. One of the first things my manager taught us years ago was how to figure out the absorption rate and ways to use it. You've detailed this excellently!

Jan 30, 2011 04:24 PM #56
Rainmaker
1,022,697
Tim Lorenz
TIM LORENZ - Elite Home Sales Team - Mission Viejo, CA
949 874-2247

Tammie

Statistics are our friend.  It gives use a snapshot of what the market is doing.

Jan 30, 2011 05:14 PM #57
Rainer
155,657
Carla Dimond
CATARRA - Mountain View, CA
(Silicon Valley)

Tammie, nice blog

Jan 30, 2011 05:25 PM #58
Rainmaker
1,538,407
Brian Madigan
RE/MAX West Realty Inc., Brokerage (Toronto) - Toronto, ON
LL.B., Broker

Tammie,

This is a very significant factor, it deals basically with supply and demand at the relevant time, not just historical figures.

Brian

Jan 30, 2011 11:54 PM #59
Rainmaker
669,569
Martha Brown
Long & Foster Real Estate, Inc., Annapolis MD 21403 - Annapolis, MD
Your Homes Around Annapolis Agent

Wonderful poat Tammie. Absorption rate is soooo important in a Sellers take on a market and you did such a grand job explaining. "0)

Jan 31, 2011 12:43 AM #60
Rainer
36,499
Gayle Henderson
RE/MAX Excalibur - Scottsdale, AZ
Your Terravita Resident Specialist

Absorption rates are something I have used for years to demonstrate to Sellers the critical nature of pricing n ordered to be the next one "bought".  I first became acquainted with the concept from a Howard Brinton-Star Power produced tape set called "First Aid Kit in a Down Market" featuring Ron Garber, Erl Whitmore and Barbara Riccio, along with others, perhaps Tupper Briggs.  It has been a while since I have relistened to those tapes.  Later an updated version was produced, however there was nothing like the enlightenment rendered from these great agents back in the mid '90's. 

Jan 31, 2011 01:58 AM #61
Rainmaker
564,104
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

Hi Tammy -- I used absorption rates extensively, but I think their value is highly overrated.  It only takes one buyer for a home, and hitting the sweet spot with creating the right condition of the home that is meeting what buyers want, whether it's strong buyers market or not, coupled with proper pricing, almost always creates success.  The whole not improving the condition aspect and having a commodity on the market, versus a true in demand product, is where all the focus should be, and having 10+ months of housing supply (MHS) is more an indication (at least in my local market) that sellers are not providing what buyers are seeking, and oftentimes, it's the condition that's lacking, even if the price is competitive.  That said, some sellers don't have the financial capacity to make improvements and create a product that someone really wants to buy, and that's tough, and goes a long way to increasing the MHS.  I tell sellers, your market says 25months of housing supply, a very strong sellers market, but here is how we can most likely sell your home in 30-60 days if you do A...B...C. After all, it only takes one buyer.

Jan 31, 2011 02:13 AM #62
Rainmaker
28,945
Bill Rozek
Embrace Home Loans, Inc. - Potomac, MD
NMLS #214260

Thanks, great information.  You've helped an old mortgage dog learn something new today.

Jan 31, 2011 04:40 AM #63
Rainer
345,726
Charlie Dresen
Steamboat Sotheby's International Realty - Steamboat Springs, CO
Steamboat Springs, CO e-Pro

Great post. One forgets about this stat that is so important. I sayed up late last night to figure what's going on in my market. Thanks for the great reminder.

Single Family Homes / inventory = 175

•·         January 2011 = 15.9

•·         December 2010 = 13.4

Townhomes / inventory = 162

•·         December 2010 = 18.0

•·         November 2010 = 20.2

Condo / inventory = 378

•·         December 2010 = 22.3

•·         November 2010 = 23

Single Family home $1,000,000 plus = 73

•·         January 2011 = 18

•·         December 2010 = 24

 

Jan 31, 2011 04:54 AM #64
Ambassador
1,704,260
Tammie White, Broker
Franklin Homes Realty LLC - Franklin, TN
Franklin TN Homes for Sale

Pam - Thanks for stopping by.

Cindy - More brokers should do this. I'm surprised at the number of agents who don't know this.

Tim - That's exactly what it does.

Carla - Thanks.

Brian - That's true.

Martha - Thanks. It is important for sellers to know.

Chris - While I do agree that it only takes one person to buy and that sometimes the reason a home doesn't sell is due to condition. Condition in comparison to those at that price. However, if the seller is unwilling to improve the condition, he might still be able to sell at a lower price. Absorption rate helps us explain this to our clients. None of this is an exact science. But it does help us explain how long their home could be on the market at a certain price.

Bill - Glad to help.

Charlie - You've got some pretty high numbers there.

Jan 31, 2011 05:16 AM #65
Rainer
153,069
Aaron Seekford
Arlington Realty, Inc. - Arlington, VA
Ranked Top 1% Nationwide 703-836-6116

Love it, Tammie. This is a great blog idea that I may revisit in the upcoming weeks. Absorption rate questions are always a part of the listing process!

Jan 31, 2011 05:24 AM #66
Ambassador
1,704,260
Tammie White, Broker
Franklin Homes Realty LLC - Franklin, TN
Franklin TN Homes for Sale

Aaron - Thanks for stopping by.

Jan 31, 2011 06:45 AM #67
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