Absorption Rate Pricing
Absorption rate is the number of homes that will sell in a certain market or defined search criteria during a certain period of time. This rate is, of course, subject to the effects of interest rates, time of year, the local and national economy not to mention the quantity, condition and price of the homes on the market. The objective for a seller is for his or her home to be included in the "sold" category as opposed to remaining on the market or "for sale" category. For example, if 24 homes have sold in the last 12 months in a particular market then the absorption rate is 2 homes per month. If there are 12 homes on the market, using the same criteria, then there is a 6 month supply of homes. A 6 month supply of homes is generally considered a "balanced" market. A supply of less than 6 months is considered a seller's market and a supply greater than 6 months is considered a buyer's market. However, not all homes in the inventory sell. Some homes will be withdrawn from the market, listings may expire, go under contract and a sale is pending, etc. Additionally, as some homes are removed from the inventory others are added. Why do some homes remain in the inventory month after month? The housing market is like any open market, buyers are looking for the home that best fits their needs for the best price. Homes with similar features compete for buyers!
How to calculate absorption rates:
Number of homes sold in a specific search criteria divided by the number of days, weeks or months equals the absorption rate. 24 homes sold / 12 months = 2 homes sold per month. The search area, criteria, price range, target market segment and time for analysis must be defined and utilized consistently.
24(homes) / 12(months) = 2(sales/month)
10(listings) / 2(sales/month) = 5 months of inventory
6 months of inventory in considered "balanced".
Less than 6 months is considered a "seller's market".
More than 6 months is considered a "buyer's market".
Any decrease in inventory may indicate a trend where more homes are selling. Any increase may indicate that less homes are selling.