Denise, What exactly is the Absorption Rate and how does it impact the sale of my home?
I was at a listing appointment last week and was asked this question. The term “days on market” is a term that we’re all familiar with. This is the average time it takes for a home to sell. The Absorption Rate provides a mathematical formula to calculate how long it will take the current inventory of homes to be absorbed into the market. When we calculate the Absorption Rate the resulting number is the average number of days on market we’re all so familiar with.
So what exactly is this formula? It’s surprisingly simple. Take the number of homes that sold in the past year and divide that by the number of homes currently available on the market. That number is the yearly turnover rate of homes. Divide that number by 12 to get the number of months it takes a home to sell. Due to expired and relisted properties most MLS databases skew the number of days on market low. This is on the other hand a simple and effective formula that gives us a good idea of how long it would take to sell the current inventory if homes continue to sell at the same pace. As real estate is seasonal, looking at the home sales for 12 months takes out the fluctuations that would occur by just looking at the previous month. Also bear in mind that due to the dynamic nature of the MLS with data changing by the hour this is not an exact science. What it does do is give us something to go on.
95 homes sold / 59 homes on market = 1.6 (Inventory turned 1.6 times in the last year).
12 months / 1.61 = 7.5 months or 226 days on market
Just when you thought that was nice and easy, I’m going to muddy the waters for you now. In my market reports I talk about the Absorption Rate for Iowa City. That’s very general. When it comes to value to you as a a seller, you’ll need to drill it down quite a bit from there. My screenshot is of homes sold in a particular price range in Iowa City. When it comes to real value it needs to be drilled down more than that by looking at particular neighborhoods. (I find the school district more helpful than subdivisions).
Let’s look at the listing appointment I was at last week for instance. 7 comparable homes, (similar style and price range), were currently on the market in that general neighborhood, (I looked at school district to narrow down the neighborhood). 7 homes sold in the last year. Using the formula outlined above that translated into an absorption rate of 12 months = 364 days. This of course turned out to be an excellent way to talk myself out of a listing! That’s okay, I’d rather deal with realistic expectations from the get go than deal with frustrated sellers calling me to ask why the home isn’t selling later. Besides, next year when the market has had time to recover this seller has a much better chance of selling his home at the price he wants than he does right now. He was fortunate and had the luxury that he could wait until next year. Iowa City and Coralville are areas where relocating sellers are a common occurrence. If you’re relocating and need to sell quickly, knowing the Absorption Rate is an invaluable tool that will show you where your home needs to be priced for a quick sale.
