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.

257 Active Listings
76 Under Contract
2 Homes Sold March 8 – March 13, 2010
5.6 Months Absorption Rate (Number of months it takes for the market to “absorb” homes)

The absorption rate in North Liberty is 5.6 months and still trending towards a sellers market. When the 76 homes under contract start closing it will be sure to have a positive impact on the absorption rate. North Liberty continues to benefit from the homebuyer tax credit as homebuyers race to meet the deadline of April 30 for an accepted offer.

Last week’s real estate market update for North Liberty

Real estate market report for North Liberty February 2010

245 Active Listings
43 Under Contract
1 Home Sold March 8 – March 13
9.6 Months Absorption Rate (Number of months it takes for the market to “absorb” homes)

Right now the absorption rate in Coralville is not looking good with a high 9.6 months of inventory on the market. Hopefully that changes in the coming months as buyers race to meet the April 30 deadline for an accepted offer for the homebuyer tax credit. On the up side, the number of homes under contract is on the rise and when they close that will impact the absorption rate.

Last week’s real estate market update for Coralville

Coralville real estate market report February 2010

606 Active Listings
117 Homes Under Contract
6 Homes Sold March 8 – March 13
8.4 Months Absorption Rate (Number of months it takes the market to “absorb” homes).

The absorption rate is calculated using the number of homes sold. I think it’s safe to say that number is skewed at the moment with so many homes under contract. Once they start closing in bigger numbers we’re likely to see a difference in the absorption rate.

What the large number of homes under contract tells us is that there’s a lot of buyer activity in Iowa City with buyers wanting to take advantage of the homebuyer tax credit before the deadline of April 30. Watch this space. It looks like the coming months are going to be really interesting!

Last week’s real estate market update for Iowa City

Real Estate Market Report for Iowa City February 2010

584 Active Listings
101 Homes Under Contract
12 Homes Sold March 1 – March 6
8.0 Months of inventory on the market

An absorption rate of 8 months means Iowa City remains a buyers market for now. The absorption rate takes into account homes sold and not those under contract. And with 101 homes under contract we can see there’s a lot of buyer activity in Iowa City with buyers wanting to take advantage of the homebuyer tax credit before the deadline of April 30, so we will probably see some changes in this trend soon.

If you’re not familiar with the absorption rate, more than 6 months inventory of homes on the market is a buyers market. 6 months of inventory of homes is considered neutral and less than 6 months a sellers market. For more info here’s a link to the first post I wrote including the absorption rate with an explanation on how it’s calculated.

Last week’s real estate market update for Iowa City

Real Estate Market Report for Iowa City February 2010

226 Active Listings
39 Under Contract
6 Home Sold March 1 – March 6
8.8 Months of inventory on the market

An absorption rate of 8.8 months means Coralville remains a buyers market. Coralville does well with move-up buyers and there is a lot of buyer activity right now. The homes sold number is starting to tick upwards, so it looks like those repeat buyers taking advantage of the homebuyer tax credit may soon have a positive impact on the Coralville real estate market.

If you’re not familiar with the absorption rate, more than 6 months of inventory of homes on the market is a buyers market. 6 months of inventory of homes is considered neutral and less than 6 months a sellers market. For more info here’s a link to the first post I wrote including the absorption rate and an explanation of how it’s calculated.

Last week’s real estate market update for Coralville

Real Estate Market Report for Coralville February 2010

253 Active Listings
65 Under Contract
12 Homes Sold March 1 – March 6, 2010
5.5 Months of inventory on the market

The absorption rate for North Liberty is 5.5 months and still trending towards a sellers market. North Liberty continues to benefit from the homebuyer tax credit and we should see some real action in the next couple of months as buyers take advantage of the credit before the deadline of April 30.

If you’re not familiar with the absorption rate, more than 6 months of inventory of homes on the market is a buyers market, 6 months of inventory of homes is considered neutral and less than 6 months a sellers market. For more info here’s the first post I wrote where I included the absorption rate with an explanation of how it’s calculated.

Last week’s real estate market update for North Liberty

Real estate market report for North Liberty February 2010

245 Active Listings
54 Under Contract
7 Homes Sold Feb 15 – Feb 20
5.4 Months of inventory on the market

North Liberty is doing well with an absorption rate of 4.7 months and definitely trending towards a sellers market. With all the activity we have now and buyers out looking to take advantage of the homebuyer tax credit North Liberty is set to do very well in the spring.

If you’re not familiar with the absorption rate, more than 6 months of inventory of homes on the market is a buyers market, 6 months of inventory of homes is considered neutral and less than 6 months a sellers market. For more info here’s the first post I wrote where I included the absorption rate with an explanation of how it’s calculated.

Last week’s weekly report

197 Active Listings
36 Under Contract
1 Home Sold Feb 15 – Feb 20
7.9 Months of inventory on the market

With an absorption rate of 7.9 months Coralville is definitely still a buyers market. Coralville does well with move-up buyers, so once the weather warms up maybe those repeat buyers looking to take advantage of the homebuyer tax credit will change the face of the Coralville real estate market. For the moment at least Coralville is struggling a bit in comparison to North Liberty and Iowa City.

If you’re not familiar with the absorption rate, more than 6 months of inventory of homes on the market is a buyers market. 6 months of inventory of homes is considered neutral and less than 6 months a sellers market. For more info here’s a link to a post I wrote a while back with more detailed info about the absorption rate and how it’s calculated.

Last week’s weekly report

511 Active Listings
96 Under Contract
5 Homes Sold Feb 15 – Feb 20
7.0 Months of inventory on the market

An absorption rate of 7 months means Iowa City remains a buyers market for now. Despite the extremely cold and long winter we’re having there are a lot of buyers out and about wanting to take advantage of the homebuyer tax credit and with 96 homes under contract things are looking promising for the spring market.

If you’re not familiar with the absorption rate, more than 6 months inventory of homes on the market is a buyers market. 6 months of inventory of homes  is considered neutral and less than 6 months a sellers market. For more info here’s a link to a post I wrote a while back with more detailed info about the absorption rate.

Last week’s weekly market report