There have been numerous Blogs, Posts, Comments for Realtors, Agents, and others about the use and formula(s) associated with Absorption Rate, but nothing addressing this topic specifically for its use by Appraisers. I am not an active blogger, but decided to contribute my views on the topic.
Definition: Absorption Rate is the mathematical representation of the relationship between supply and demand. In the Real Estate Industry, it is the calculation of how long it will take the inventory available to be absorbed (sold) by the market.
Realtors and Agents are probably the ones that use Absorption Rate the most for their listings and with their Buyer/Seller clients to help determine a selling/purchase price and get an idea of how long it will take for the property to sell at a specific price. Appraisers can benefit by using and including the Absorption Rate in their reports and the Absorption Rate Analysis can increase the accuracy and creditability of the report.
The Absorption Rate is the best indication (for appraisers) of market conditions and performance. Which is especially helpful in accurately determining the Housing Trends on the URAR (Uniform Residential Appraisal Report) or GPAR (General Purpose Appraisal Report) and which boxes to check for -- Property Values (Increasing, Stable, Declining) -- Demand/Supply (Shortage, In Balance, Over Supply) -- Marketing Time (Under 3 months, 3-6 months, Over 6 months), also the Exposure/Marketing Time on the FUA - FIRREA/USPAP Addendum. While most will use DOM (Days On Market), Active and Sold Comparables (for the past 12 months) in the subject neighborhood, which is required to included in the appraisal report, they will not take the extra step to calculate the absorption rate with the information at hand and include comments. Others are doing it without realizing it, but don't include comments regarding the absorption rate in the "canned" comments already included in their report.
The Formula: The basic formula for calculating the rate is simple, and can be used for any type of property being appraised (Single Family, Multi Family, Commercial, Land, etc). FIRST - Divide the number of homes sold in one year by 12 (to determine the number of homes sold in one month). SECOND - Divide the number of current listings by the number sold in one month. This gives you the Absorption Rate or the number of months it will take for the current supply to be absorbed.
Example: Sold in 1 year - 39 comparables (page 2 URAR)
39 / 12 = 3.25 (sold in one month)
Comparables currently offered - 9 (page 2 URAR)
9 / 3.25 = 2.77 (Absorption Rate)
There are different variations of the formula, depending on who is calculating it and for what purpose. For an accurate overall condition of the market, you would include ALL types of properties sold and ALL types of current listings - including listings not showing in the local MLS, such as FSBO and possible Foreclosures, REOs, and New Construction. The most common use would be for Property Specific - similar to the subject property, as searching for comparables. Realtors/Agents would use similar price or price range as another search parameter. With different variations in the search criteria, the rate can be calculated for any time period (1 week, 1 month, 1 quarter, 1 year, etc) and for any specific area (neighborhood/subdivision, market area, zip code, area/grid, County, City/Town, State) or any combination thereof. With the use of spreadsheets (such as Excel) a Graph or Chart can be created for a more visual explanation.
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