What are absorption rates and why are they important when selling your house?
As the number of buyers who are actively looking for a new house increases and the number of houses available for sale decreases, then the prices of the houses that are on the market will increase. Conversely, if the number of buyers looking for a new house decreases compared to the number of new houses on the market, then the prices of the houses will decrease (or take longer to sell). This is the principle of supply and demand which is applicable for any good or service.
In the world of real estate, to determine the level of supply and demand, you must analyze the absorption rate. This is an estimate of the approximate time it will take for a certain property type to be sold or leased in each area.
In order to calculate the absorption rate, you need two pieces of information. First, you need the number of properties that were recently sold and second you need the number of properties that are currently on the market (in a specific area). You simply divide the homes available for sale by the number of homes sold (within a specific time period) and that gives you the absorption rate. In order to paint an accurate picture of absorption rates, you need to refine the pool of properties you are using for the calculation. Therefore, if there are houses that have sold in your town ranging from $300,000 to 2.5 million and your house will probably sell for $600,000 then its best to create a price band and look at the absorption rate for properties between $500,000 and $700,000.
As an example, if 6 houses were sold every month for the past 3 months (on average) and there are 42 homes available for sale, then it will take 7 months to sell all of the current inventory. This would represent a buyer’s market as described below:
A seller’s market is when the absorption rate is 1-4 months.
A normal market is when the absorption rate is 5-6 months.
A buyer’s market is when the absorption rate is 7 months plus.
When preparing a CMA, an agent must take into account the absorption rate as this will determine market conditions, how quickly a house will sell and what the competition looks like.
For more information, or if you need a referral for a knowledgeable Realtor© in your area, contact:
Coldwell Banker Residential Brokerage
211 South Street
Morristown, NJ 07960
(O) 973-267-8990 x153