What is Absorption Rate and How Does it Affect Buying or Selling A Home
Home Sellers - Do you know Your Neighborhood Absorption Rate?
Calculating the absorption rate for an area will help you track trends and determine how you want to position your home to get it sold. The information changes periodically as it is determined by number of homes sold as well as number of homes currently listed.
So, what is the absorption rate?
The number shows the rate at which the inventory of homes for sale are being sold in a particular area, thus, calling it that area's "absorption rate".
Is the inventory increasing or shrinking? How do I find out? Here's how to calculate the absorption rate:
First, pick the neighborhood you want to determine the absorption rate for, then pick a time frame you want to look at. Using various months help you determine the trend, I like to look at 12 months, 6 months and 3 months. Here's an example using 12 months:
1. Find out how many homes have sold in that time frame (12/6/3): ex. 24 closed transactions in 12 months
2. Divide the # of homes sold by the # of months used: ex. 24 divided by 12 equals 2.0 homes sold per month
3. Determine how many homes are currently available for sale: ex. 7 active listings currently in MLS
4. Divide the current active by the # of homes sold/month by that number: 7 divided by 2 equals 3.5 month's supply of homes
Based on the neighborhood used in the example above, we had a 3.5-month supply of homes on the market at that time. This helps us develop expectations of how quickly or how slowly a home will sell, and how you should position your home to sell!
Let's sum this up, if you have:
· 1 to 4 months' supply of homes - It's safe to say your neighborhood has a Seller's Market
· 5 to 6 months' supply of homes - This would be considered a Neutral market
· More than 6 months' supply of homes - A large inventory of homes would be considered a Buyer's market
If you would like an agent to determine the absorption rate for your area, contact us!