Absorption Rates and What They Mean to Home Sellers
If you’ve ever talked to a real estate broker about selling a house, the words “absorption rate” should have passed their lips at some point in the conversation. If you want to sell your home, absorption is a pretty decent concept to understand.
The absorption rate has to do with demand. It is the rate at which the market absorbs the inventory of homes that are for sale – in other words, how fast are home buyers scooping up what is available? Or, on a more personal level, how long will you have to suffer through all these inconvenient showings before getting an offer?
Quick Econ 101 – If supply is abundant and demand is low, then sellers will accept lower prices to achieve sales; if supply is low and buyer demand is high, then sellers will be able to command higher prices. Of course, supply and demand are constantly fluctuating.
If many people want to buy a home (remember 2005 and 2006) and there are few homes on the market, the prices of the available homes will rise as people compete for what is for sale (multiple offers). This scarcity causes prices to rise. We call this a “Sellers’ Market” because Sellers have the upper hand in negotiations – they can hold firm on price and won’t have to make every little repair a buyer may want.
If few people want to buy, or are able to buy, a home (2008-2011) and there are many homes on the market to choose from, the prices of those available homes will fall as sellers try to entice the few buyers to “buy mine, buy mine! This is a “Buyers’ Market” because Buyers have the upper hand in negotiations – they may pay below asking price and be able to get repairs and seller-paid closing costs, etc.
Anyway, back to absorption rates relative to real estate sales.
According to the National Association of Realtors®, a Sellers’ Market occurs when there is less than 6 months of inventory on the market (more buyers than sellers); a Buyers’ Market occurs when there is more than 6 months of inventory on the market (more sellers than buyers). The market is said to be in Balance (or equilibrium) when there is 6 months of inventory, indicating an equal number of buyers and sellers.
During this last recession, it was not uncommon for any given town in our area to have 18-24 months of inventory on the market. We went through a long period where we would see forward progress in terms of price and units sold, and then the numbers would slip back again. In mid-2012, we saw prices stabilizing, inventories dropping and more buyers coming into the marketplace. As we head into the spring market, some area towns are facing a shortage of housing inventory for sale.
The absorption rate is a simple mathematical calculation. We look at the number of homes that have sold in a particular town (or area) over a given time period – the last 6 months for example. If 12 homes sold in the last 6 months, that equates to 2 homes selling per month – that is the absorption rate. Then we look at the number of homes that are currently on the market. If there are 20 homes currently on the market and 2 homes per month are selling, then we have 10 months’ worth of inventory – so, in this example, it would be a Buyers’ Market.
You can get more sophisticated and look at particular price ranges and you can also determine which way the market is trending by looking at a sub-set of sold data for a most recent, shorter time period, and the number of listings that are pending sale (under contract). This gives us an indication if the market is stalling or heating up. Of course, the seasons also impact home-buying activity somewhat.
So, you’ve read all this and you’re wondering why you would care. It’s all about the Price/Time Continuum! This data helps answer the question, “How much can I get for my home and how long will it take to get it?”
If you’ve ever sold a house, your REALTOR® probably prepared a Comparative Market Analysis (CMA) to determine the price range in which your home is most likely to sell, given current market conditions, and your home’s location, size, features, finishes and condition.
The CMA program that most brokers use calculates a suggested price range. Look at that price range in light of the current absorption rate – Is it a Buyers’ Market, a Sellers’ Market, or a Market in Equilibrium? If it is a Buyers’ Market, and you need to sell relatively quickly, you will want to be aggressive and price toward the lower end of that range. If it is a Sellers’ Market and you have some time, go for it – price at or near the high end of the range.
The absorption rate is just one factor in the market dynamic that should be part of your discussion with your REALTOR® about pricing and marketing your home for sale.
If you’re ready to put your home on the market, or just starting to think about it, we’d be pleased to have that discussion with you.