What is an absorption rate and what does it mean when listing my home?

Absorption Rate

The absorption rate calculation is based upon houses matching the followin criteria:

Area/Neighborhood______________________

Style of House _________________________

Age of House __________________________

Size of House __________________________

Price Range ____________________________

Other__________________________________

Using the above information, the Multiple Listing Service (MLS) reports that there were ____________ houses sold in the last ___________months.  Dividing the number of sales by the number of months, tells us how many homes (meeting the above criteria) the market is absorbing each month, ie, the monthly absorption rate.

_______________________ / ____________________ = _____________________

Number of Sales               Number of months         Sales per month

Months of Inventory

Using the above information (absorption rate), we can now determine the months of inventory there is on the market for those houses.

The MLS reports that there are __________houses currently for sale that meet the criteria.  Dividing the number of active listings by the number of sales per month tells us how many months it will take to sell the current inventory. 

______________________ / _________________________ = _______________________

# of Listings                     # of Sales per Month          Number of Months Needed to Deplete Inventory

The absorption rate along with the average days on the market helps us determine how to price a home.  Seller's will want to resist the urge to price their home at the top of the market.  Pricing a home too high can cost a seller a lot more in the long run.  Don't forget the seller is typically paying interest during the listing period, the exception are those who own the home outright.  If a seller pays interest for an additional 3 months plus takes a price decrease in the listing period they are losing money at a rapid pace.  Used correctly the absorption rate can also help Seller's understand that adding the "negotiating buffer" can also be costly.  Pricing the home right is the most important job of listing a home.