Ever wonder how an appraiser knows how long your home will take to sell? Being an expert in your market makes us at Bostedo Appraisal Services the authority — the guys and gals everyone goes to when they have a complex question about real estate.
Well, allow me to introduce you to Absorption Rate. Before your mind wanders off into numbness, let me also tell you that this is one of the most practical metrics or measurements you can learn for your market or for you as a seller. Better than that, it will only take you a few minutes to learn it. It should be pointed out, although the manufacturing segment of the economy has been using this metric for decades, real estate, for the most part still doesn’t.
OK, so what is Absorption Rate? Simply put, it is the rate at which a market absorbs or eliminates inventory. Markets are always changing: new inventory is being added and old inventory is being sold or absorbed. Absorption rate helps you to take that fluid, ever-changing market and bring it into a measurable snapshot that you can use to advise your clients or the ammunition needed as a home owner to know how long it should take your home to sell. At this point I need to say; it doesn’t take into account any new homes coming on the market in the future, but just asks “If I were to sell every home on the market today, how long would it take me?” It can also be used to determine if it is a buyer’s market, seller’s market, balanced or stable market.
Let’s start by using what we know as an example. One of the practical uses for higher mathematics was to allow industry (such as Wal-Mart, Target, Macy’s or your local grocery store) to determine the precise level of inventory to stock. Stock too much, and the company tied up cash or debt in sitting inventory and carrying costs. Too little, and the company would lose sales by not having the products on hand.
Now let’s apply it to real estate. Have you ever wondered why the average Days on Market (DOM) number from your local MLS never feels right? Why the MLS always seems to paint a rosier picture than reality? That’s because it’s not right! Sometimes it’s off by a little; other times it’s off by a mile. But it’s never accurate.
So why the disparity? This is because the MLS calculates the average DOM as the average days on market for the listings that actually sold. What it leaves out of its calculation altogether, are homes that were withdrawn, listings that expired, listings that were withdrawn for a day and then re-listed to restart the clock, or those that were never put in the MLS until they sold, (like new construction where they might list only one home in a subdivision, but actually have 20 for sale). And all of those affect the reported DOM within your local MLS. Not so when using the Absorption Rate method. You’ll know exactly how many days it takes inventory, on average, to turn over.
Let’s suppose a builder needs to know how long a new development will take to sell. Using absorption rates for various price points, the builder could wisely determine which price points to focus on in order to maximize his sales. Or suppose an agent was going on a listing appointment and was able to advise a perspective client of the number of month’s inventory of homes like his that are currently on the market. Lastly, let’s not forget the homeowner who may be considering if this may be the right time to move or has a personal situation where they need to know how long it will take their home to sell?
|As an agent, what if you were working with a buyer, negotiating for their dream house. Imagine if you were able to communicate to the seller’s agent that there was over a year’s worth of inventory currently on hand for that particular price or type of home? You could easily give the listing agent the information he needed (and probably didn’t know) to help him persuade his client to consider your buyer’s offer. This is also a great tool that can be used by investors.
Well, believe it or not, it’s easier than you might think to have those numbers. All you need to know is how many of a certain price or type of property sold in the last twelve months, and how many of that same price or type of property is currently on the market.
There are 3 steps to calculating the absorption rate:
For example, the same calculation as above but a different way, just depending upon your style of math. Let’s say that in the last 12 months there were 8,000 homes of a certain price or type sold. Currently, there are 2,000 on the market. That means that the current inventory level turned over, or sold, four times in a year. (8,000 / 2,000 = 4.0)
Now, divide 12 (the number of months in a year) by 4.0 (the inventory turnover rate) and you have 3.0 (the absorption rate) to put it into months. The absorption rate is 3.0 months. That means is there is currently a 3.0 month inventory of properties of that certain price or type on the market.
Either way 1+2 or 2+1 or 4-1, the answer will be 3 and you can get the absorption rate for any location, time frame and type or style of property you are looking for. I just showed you two ways to do the math. Some like to divide and some like to multiply, the choice is yours.
Here are some quick calculations for all sales within Allegheny County over a one year time frame from 03/07/2014 to 03/07/2015. While this is an interesting overall statistic, it is really no help when trying to figure out the absorption rate in your local market of a particular style or type of property.
See how easy that was? But I’ll make it even easier. Our company created the following Absorption Rate Calculator for you to use and it does all the math for you. Just plug in the two numbers, press the button, and voila… the absorption rate! Let me know what you think.
If you want to try out my calculator, it’s completely free. Just click the link: Absorption Rate Calculator to go right there.