Absorbtion Rate or Absorption Rate?

 You say tomato…

A lot of my clients are wondering what absorption rate is and I was trying to best explain it when I happened upon this article from realtytimes.com

absorption rate

Absorption Rate Analysis for Resale Agents
by Jerry Rossi

In this rapidly changing real estate market, agents and brokers need new tools. Not another technology tool, we are over sold and over stocked on those, but tools that help us convey evolutionary market changes to our sellers.

‘Evolutionary?’

Yes, the ups and downs of prices, inventory, interest rates, buyers, and sellers are the evolutionary process of markets. John Thompson, founder of Chase National Bank in 1877 said, “Interest rates are going up, then down, then they’re going to level off.”

When the going is good and our sails are full of wind, we tend to forget what it was like in the calm (dead wind). For those of us old enough, in real estate years, to remember 1979 with interest rates fluctuating from 14 to 18 percent, we know dead wind. But we used all the tools we had to power on.

I’ll never forget sitting with a first time buying couple extolling the merits of the tax write off of their new 18 percent loan. Make lemonade out of lemons, right?

Today, we have different pressures, one being the switch from homes selling as fast as they hit the market to the market hitting the sellers with sluggish sales.

So what tool can help? Absorption Rate Analysis; that is, how many homes are absorbed by the market on a monthly basis and how does it affect me and my home or listing?

Absorption Rate has been used by the New Homes industry for years and, in the early 90’s, I introduced Absorption Rate Analysis to resale agents in the CRS courses I was teaching. Most rebuked the idea as an unnecessary step in the listing process. A few, however, like Scott Case in Iowa latched on to the idea. Not only did he wow his sellers with new information, he was able to get properties listed at the correct price point.

So what is Absorption Rate? The following is an example, along with visuals and dialogues that will help you help your sellers define the market and determine how to position their home for the fastest sale:

Example of application:

Your Right Price Analysis on a seller’s home determines a Price Point of $539,000.

The sellers inform you that they want to list their property with you for $589,999.

To explain the effect of current market activity and validate the Price Point derived from your RPA, you create an Absorption Rate (AR) Analysis as follows:

First, determine the number of like-kind homes that have sold in the last 12-months at their expected price of $589,999.

8 Properties sold and closed in the last 12 months

Second, divide this number by 12 to determine the number of properties absorbed by the market on a monthly basis.

8 / 12 = .67 absorption rate

Third, you search the numbers of like-kind homes that are currently on the market (for sale) at their expected price of $589,999.

17 Properties are currently on the market

Fourth, divide this number by the absorption rate to determine how many months it will take to absorb what is currently for sale at their expected price of $589,999.

17 / .67(AR) = 25.37 month supply

Fifth, determine the number of like-kind homes that have sold in the last 12-months at your RPA Price Point of $539,000.

27 Properties sold and closed in the last 12 months

Sixth, divide this number by 12 to determine the number of properties absorbed by the market on a monthly basis.

27 / 12 = 2.25 absorption rate

Seventh, you search the numbers of like-kind homes that are currently on the market (for sale) at your RPA Price Point of $539,000.

6 Properties are currently on the market

Eighth, divide this number by the absorption rate to determine how many months it will take to absorb what is currently for sale at your RPA Price Point of $539,000.

6 / 2.25(AR) = 2.67 month supply

Published: June 23, 2006  realtytimes.com
Use of this article without permission is a violation of federal copyright laws.

Get it?  Yeah me too! Call me if you have questions.

Virginia Lord

Raising the Bar in Real Estate

612.799.1700

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s