Why Absorption Rates are Important When Selling Your Home

Why Absorption Rates are Important When Selling Your Home

First important thing to understand about absorption rate is that appraisers are required to use it to determine your homes current value.  Therefore it is something that you will need to understand so you can make sure your home is being valued properly.

Secondly, you will need to know the absorption rate so you can determine how aggressively you will need to price your home and to get an estimation of how long it may take your home to sell given current inventory.

What Is Absorption Rate: essentially absorption rate is a method to determine how fast homes are selling in a given area AND weighs supply and demand of current housing inventory on the market. A declining figure indicates the inventory is decreasing as more homes are being sold than are coming onto the market. A rising absorption rate implies that there are more homes coming onto the market than there are buyers willing to buy at the market prices.

For instance: If 12 homes sold in the last 12 months that means that the market will absorb 1 house per month on average.  If there are 10 homes currently on the market, there is a 10 month supply and so on.

¨       a 6 month supply is considered a balanced market:

¨       less than a 6 month supply is considered a sellers market, and

¨       more than a 6 month supply is considered a buyers market.

This figure is pretty easy to determine. You’ll need to know two things – the total number of active listings (homes currently for sale) and the total number of homes that sold over a specific period of time. To get the absorption rate for your area, divide the total number of active listings by the average number of sales per month and you get the absorption rate.

Using Absorption Rate To Sell Your Home: Once absorption rate is figured you will have a good statistical estimate of how many months it will take to sell all the homes in your area at the current rate they are selling. Keep in mind this number is a snap shot and looks only at current inventory.  The higher the number, the more aggressive you’ll have to be to get your home noticed and sold.

Armed with the absorption rate you can decide how aggressive you will need to be.  If you have a high absorption rates and need to sell your home in the first few months you will truly need to have one of the “best deals” of all the competition…meaning best combination of location, condition and price. Also remember that as homes sell, news ones come on the market that may be priced more competitively, so keep track of what your competition is doing so you can act accordingly.