Absorption Rate in Real Estate

Absorption Rate Key to Successful Pricing

Telling sellers the price they want to hear may get you the listing, but it won’t sell their home.

 And the right price depends in large part on the current absorption rate in your market. Here’s how you find that:

• First, determine the number of homes closed in your market over a specific period — say, 12 months.
  
• Next, divide the number of homes by the number of months in the period — in this case, 12. This calculation gives a per month absorption rate.
• Last, divide the rate into the number of current listings. This yields the months’ supply of homes.

Six months’ supply is considered a balanced market — when the number of listings roughly equals the number of buyers.  Numbers over six represent a buyers’ market and those below a sellers’ market.

To assess sales trends, you can also calculate supply over shorter six- and three-month periods. Price in real estate is mostly a matter of supply and demand, just like in every other industry.

Once you have these basic calculations down pat, you can focus on absorption in particular neighborhoods or price ranges.  Calculating local absorption rates will give the sellers the information they need to price their homes to sell.

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Source: NAR