What is an Absorption Rate and How Does It Affect You?

By
Real Estate Broker/Owner with RED Properties NC #129285

Many times when I create the monthly market reports I reference the Absorption Rate.  On listing appointments I mention the Absorption Rate and even use it to assist me with my Competitive Market Analysis.  An Absorption Rate is a great indicator of what is happening in a Absorption Ratelocal real estate market.

An Absorption Rate quite simply is the supply of homes that are on the market.  For instance, if there is an Absorption Rate of 8 is would mean that should NO other homes be listed it would take 8 months for the currently listed homes to sell or to be "absorbed" back into the market.

Typically, a balanced market has an Absorption Rate of 6.  That means that it is neither a Sellers Market nor a Buyers Market.  When you see the Absorption Rate go above 6 then you have entered into a Buyers Market (more homes on the market) and conversely when you see an Absorption Rate dip below a 6 the you are in a Sellers Market (less homes on the market).

A buyer's market means that there are more homes on the market which then in turn means more variety and most likely lower prices due to the competition among the listings.

A seller's market means that there are less homes on the market which then means that prices are most likely higher because there is now a demand for properties.

Absorption RateGiven the current economy it is no surprise that we are seeing abnormally HIGH Absorption Rates all over the country.  In the Raleigh NC area, which includes Wake Forest, we are seeing Absorption Rates as high as 11 in some areas (all price points included).  HOWEVER, when you break that down into price points we are even seeing some Absorption Rates as high as 84.  Currently, there is a Price Point of $400,000 - $599,999 in Fuquay Varina/South Wake County with just that Absorption Rate.  And, yes, that means that if there were NO other homes listed in that price range it would take 84 months (7 years) to sell the current inventory.  In the Wake Forest area our highest Absorption Rate is 72 and that is for the Price Point of $800,000+.

Given that, in general, Absorption Rates are high the most critical thing a home seller can do if they are putting their home on the market is to PRICE IT CORRECTLY.  This is most definitely a Buyers Market and there just isn't much leverage that a seller has.  With so much competition not only does a property need to be priced properly AND COMPETITIVELY but also in TOP condition and staged.  Quite honestly, there is just TOO much competition out there right now to even try and play games if you are serious about selling your home.

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 RED Properties RaleighRed
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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Anja Kerstens 08/04/2011 07:06 PM
  2. Leah Henderson 08/05/2011 09:55 AM
Topic:
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Show All Comments
Rainer
47,017
Lori Fishkind
Reliant Realty - Franklin, TN
Realtor

I would add that it is best to do 3 month, 6 month and 12 month absorption rates, as they can vary wildly.

For those who asked, absorption rates are very simple to calculate.  (And it is not a stagnant number,  it will change with homes listed, and homes removed from the market).  At best, it is a "snapshot in time", and is helpful for showing trends.

For a 6 month absorption rate, first, look at the history of homes that have CLOSED in the past 6 months.  If you have 12 closed, you have an average of 2 per month.

Then, look at the number of ACTIVES on the market.  If you have 16 active homes, you will have an absorption rate of 8.  (Actives divided by 2).  It merely means that history has shown that the area closes an average of 2 homes per month.  Taking that average, you can fomulate an educated guess as to how long it might deplete the current inventory of what is currently active.  

It helps to use absorption rate positioning in your listing presentation.  If the rate is 8, and they want to sell quickly, they simply have to be #1 or #2 in the options available in their area.  This can be accomplished in part, by pricing and condition.  

Absorption rate is a trend, not a prediction, and a rate of 8 months doesn't mean it will take 8 months for that particular home to sell.  That is where the aforementioned absorption rate positioning comes in.  

 

 

August 04, 2011 06:55 PM #34
Rainmaker
308,992
Anja Kerstens
Summit Realty Group - Gilroy, CA
GRI, CDPE, CHS, ASP, Selling Silicon Valley Real Estate
I couldn't have explained it better. I will re-blog.
August 04, 2011 07:04 PM #35
Ambassador
1,538,080
Gary Woltal
Keller Williams Realty - Flower Mound, TX
Assoc. Broker Realtor SFR Dallas Ft. Worth
Great feature topic Leesa and so well explained. Many areas of the country absorption rates have soared. Texas being backwards of everywhere else all the time we have seen ours come down as so many of our over flooded new home builders have gone out of business.
August 04, 2011 07:09 PM #36
Rainmaker
633,405
Leesa Finley
RED Properties - Wake Forest, NC
RED Properties - Raleigh NC Real Estate

Thanks, Melanie for stopping by and I am so glad that you found the post useful.

August 04, 2011 07:18 PM #37
Rainmaker
633,405
Leesa Finley
RED Properties - Wake Forest, NC
RED Properties - Raleigh NC Real Estate

Thanks so much Lori for you well received contribution!!! I hope that my local consumers/blog followers get to read your comments!  

August 04, 2011 07:20 PM #38
Rainmaker
849,410
J. Philip Faranda
J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY - Briarcliff Manor, NY
Broker-Owner

There was no mention of paper towels in this article. I should be confused, shouldn't I? =)

August 04, 2011 09:07 PM #39
Rainmaker
603,508
Barbara Altieri
RealtyQuest, Fairfield and New Haven County CT Homes for Sale and Real Estate - Shelton, CT
REALTOR - Fairfield County CT Real Estate

Leesa - Great explanation.  I use absorption rates in my market reports and stress that a rate has to be calculated for the seller's price point.   Calculating, understanding, explaining and using the rate effectively like you do is what puts you way above many others who don't.

August 04, 2011 09:31 PM #40
Rainer
177,469
Rosalie Evans
Meritus Group Real Estate - Sioux Falls, SD
The Evans Group, Sioux Falls, SD Homes For Sale

Absorption rates are an awesome tools to speak of when doing a listing presentation and I am not sure why everyone does not use them! As for those rates....holy moly I am glad I am not selling around there! Sometimes we complain but yet at the same time we should be thankful for what we have! I might although question this after we get our first foot of snow here this winter!

August 05, 2011 12:26 AM #41
Rainmaker
650,960
Evelyn Kennedy
Gallagher & Lindsey, Alameda, California - Alameda, CA
Alameda, Real Estate, Alameda, CA

Leesa:

Very good explanation of absorption rate.  This figure is so important to both buyers and sellers and should be fully explained to them during listing appoints and initial meeting with buyers.

August 05, 2011 01:45 AM #42
Rainmaker
313,710
Sandy Acevedo
951-290-8588 - Chino Hills, CA
RE/MAX Masters, Inland Empire Homes for Sale

Another reason to price it right. Great explanation on a really important topic.   

August 05, 2011 02:06 AM #43
Rainmaker
715,663
Jackie Connelly-Fornuff
Long Island NY Real Estate Agent - Lindenhurst, NY
Century 21 AA Lindenhurst NY

Great post about absorption rate Leesa! When I use my charts for this, sellers get it. It's better to explain and show them besides what homes have sold for what in our CMA's.

August 05, 2011 07:11 AM #44
Rainmaker
46,627
Chris Head
William Raveis Real Estate - Norwell - Norwell, MA
Realtor - Marketing Specialist - Norwell, Marshfield, Scituate Real Estate

Congratulations on the feature! This hit my facebook wall!

August 05, 2011 07:55 AM #45
Rainmaker
892,536
Michael Setunsky
Michael's Commercial LLC - Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Leesa, a very nice analysis of how absorption rates relate to the market. I do monthly absorption reports of my market area. This allows a potential buyer or seller at a glance of what the market is doing.

August 05, 2011 09:44 AM #46
Rainmaker
727,225
Will Nesbitt
Nesbitt Realty at Condo Alexandria - Alexandria, VA
Nesbitt Realty is a family-run brokerage.

Its a good article for both buyers and sellers to determine the selling price. 

August 05, 2011 01:07 PM #47
Rainmaker
633,405
Leesa Finley
RED Properties - Wake Forest, NC
RED Properties - Raleigh NC Real Estate

Thanks so much, Anja - i greatly appreciate it!

August 05, 2011 02:37 PM #48
Rainmaker
633,405
Leesa Finley
RED Properties - Wake Forest, NC
RED Properties - Raleigh NC Real Estate

There were quite a few small builders here as well Gary that didn't make it.  The new home inventory was truly staggering - a little more stable now.

August 05, 2011 02:38 PM #49
Rainmaker
633,405
Leesa Finley
RED Properties - Wake Forest, NC
RED Properties - Raleigh NC Real Estate

ROFL!  I was actually going to reference Bounty, Phil but thought better of it.  Perhaps I should have?

August 05, 2011 02:42 PM #50
Rainmaker
633,405
Leesa Finley
RED Properties - Wake Forest, NC
RED Properties - Raleigh NC Real Estate

Thanks for stopping by, Barbara!  You are absolutely correct!  An absorption rate within a sellers price point is VERY helpful during a listing appointment!

August 06, 2011 09:15 AM #51
Rainmaker
633,405
Leesa Finley
RED Properties - Wake Forest, NC
RED Properties - Raleigh NC Real Estate

Certain price points in this area are VERY high, Rosalie, however, the overall Absorption Rate is very attractive compared to other areas of the country.  Our overall 9 is a welcome sight!

August 06, 2011 09:18 AM #52
Rainmaker
633,405
Leesa Finley
RED Properties - Wake Forest, NC
RED Properties - Raleigh NC Real Estate

You are so right, Evelyn!  Once a buyer or seller actually understand WHAT an Absorption Rate is they can better understand how it impacts them.

August 06, 2011 09:19 AM #53
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Rainmaker
633,405

Leesa Finley

RED Properties - Raleigh NC Real Estate
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