Absorption rate simply gives the user the rate at which properties are being “absorbed” by the market. In its simplest form, it tells you how many properties sold during a given period…usually a month. The critical component in calculating absorption rate is to use the correct data. The more specific, the better. For example, it’s not too difficult to find published numbers, but they are typically a broad brush approach, a city, a county, or maybe even a state.
As a seller of a property, you want to know what the demand is for “your” type of property, in “your” neighborhood…which may vary greatly from the broad brush number. If your home is a 4 bedroom, 3 bath home, you’ll wasn’t to know the absorption rate for other 4/3’s, as the absorption rate for 2 bedroom or 3 bedroom may vary greatly. Insist that whoever calculates your respective absorption rate, is using the right areas, and the right property attributes, so you are well armed with information you can use to price your property, and market your property.
Along with the absorption rate, you’ll also want to know how many “months of supply” there are of your particular type of property. This will assist you with a means by which you can project the time it will take to sell your home. Typically, months of supply offers us insight as to where the market is, and where it is headed, as seen by the following:
0-4 months=SELLER’S MARKET
5-6 months= BALANCED MARKET
Over 6 months= BUYER’S MARKET
*Less than 2 Months of supply will place strong pressure on prices upward that could result in as high as double digit appreciation.
* 3 to 4 Months of supply will place pressure on prices upward, resulting in appreciating values.
* 5 to 6 Months of supply is generally considered a balanced market with little to no fluctuation in value.
* 7 to 8 Months supply is going to result in downward pressure on prices, leading to declining values.
* Over a 9 Month supply is an extreme oversupply, placing strong downward pressure on prices, potentially at a double digit annual rate.
Think about what happened in the last bubble and subsequent crash…armed with this knowledge, many people would have reacted differently perhaps. Since absorption rate does not take into consideration any new listings coming on the market, it is equally important to know the trend of new listings, to help project any impact to absorption. In closing, insist that your agent be able to educate you, and calculate for you, all 3 of these critical components:
*absorption rate (and the data used to calculate it)
*months of supply of inventory
*90 day trend for new listings added to the market