What is an "Absorption Rate". It's the best health indicator for your housing market
As we come to the middle point of the year for 2009, I figured I’d discuss something a lot of people would probably want to know. For those that ask me how long it will take to sell their home, what price can I actively put my home on the MLS for, or just a good indicator of market performance, I will try to help you here.
Let’s start with the “Absorption Rate.” By definition, the Absorption Rate is the average of number of homes sold per month over a particular period of time. That’s it! No science to it. Simple enough, right? Wait, it gets easier.
Instead of trying trick you into thinking I am so smart, I will tell you that calculating the absorption rate takes simple division that you learned way back in the 6th grade. The math part of the equation is you need to take the number of homes sold and divide it by the number of months you are analyzing.
- If 12 homes sell in 6 months, the monthly absorption rate is 2.
- If 24 homes sell in 90 days, the monthly absorption rate is 8.
Inventory Depletion should be used to identify where a market is at as well, and is a critical tool that realtors NEED and barely EVER use! Inventory Depletion is determining how long it takes the homes on the market to sell. Well, this is also figured out by elementary school division.
To determine how long it will take the homes that are on the market to sell, the number of homes on the market is divided by the monthly absorption rate. Below is an example:
- If there are 12 homes on the market, and the monthly absorption rate is 2, then there are 6 months of available inventory on the market. In laymen terms, it will take 6 months to sell these 12 homes at the rate of current market performance.
How about the $6 million dollar question: How can you tell when it’s a buyers market or sellers market?
The amount of inventory determines the market side of things. A “neutral market” is 6 months of inventory. This is also the time when builders begin to put their shovels in the ground following inactivity in a down market. Anything less than 6 months of inventory is considered a sellers market. Conversely, anything more than that is a buyers market.
These simple valuations are the best means of analyzing housing market performance. Absorption rates are used to indicate market performance as well as indicating market performance for a particular aspect of a market, ie. price.
Stay tuned for Monday. I am going to be exposing the Absorption Rates and all the other valuations for Hoboken and Jersey City Real Estate. Sorry, I would do it now, but it’s Friday 5:30 p.m and I have to meet a client…errr…..friend….errr…drinking buddies for our Friday cocktails where ALL we do is talk about recent current events so I can write about it just for you on Monday!
Be well and have a great weekend. Always remember, call New Jersey Real Estate Guys to discuss any real estate related topic. We are your #1 Guys!