Welcome To Bergen County

head_left_image

What Is ABSORPTION RATE & How Is It Calculated?

Originally posted at Jersey Real Estate Scene: What Is The Absorption Rate In Real Estate And How Is It Calculated?


What is absorption rate and how is it calculated?

The Absorption Rate is a calculated "pace" at which properties listed for sale have been selling in a specific market area. When measured consistently, absorption rate is a useful indicator in determining future supply and demand trends in a market. If market conditions remain the same and no new listings are added to the area's inventory, it determines the pace at which current inventory should take to sell out. This is most often measured in months and a "healthy" (balanced) market's absorption rate generally falls in the 5 - 7 month range.

The absorption rate is certainly not a highly scientific calculation or absolute in its findings, but it does help to establish a trend line and is a good tool for a savvy agent or broker to have in their belt as it further establishes them as a market expert. Another useful indicator and a better measure of a housing market's overall health is liquidity. (Click the link to find out more.)


What information do we need to calculate the absorption rate?

We need 3 pieces of information:

  • The # of SOLD listings in the market area
  • Specific TIME frame to be measured
  • The # of ACTIVE listings (homes or condos currently listed for sale)


How do we calculate the absorption rate and find out how many month's supply of inventory we have?

We divide the # of homes SOLD by the TIME frame to get the "Absorption Rate". Then, divide the # of ACTIVE listings by the absorption rate to see how many months inventory we have (...or, how long it should take to sell off the current actively listed properties).


Lets say 24 homes sold in Your Town, NJ in the last 6 months (24 / 6 = 4). So, the absorption rate is 4 homes sold per month. If the current active inventory in Your Town is 40 homes  (40 / 4  = 10), it should take 10 months to sell off the homes that are currently listed for sale. (This could support a conclusion that there may be an oversupply of available homes in Your Town, currently.)


As I'd mentioned, absorption rate is not an exact science, rather a good market indicator that is very useful in establishing local market supply and demand trends.


What Is Real Estate Market Absorption Rate & How Is It Calculated?I’m Brian Morgenweck, Broker/Owner

of Power Realty Group in Bergen

County, NJ. If you have any questions,

I’m here to help.

Connect with me at (201)489-3020.

Please visit JerseyHomeScene &

JerseyCondoScene & find out how to

list your Bergen County home or

condo with greater confidence... and

get better results.



What Is Absorption Rate & How Is It Calculated?

contact
8 commentsBrian Morgenweck • January 11 2012 10:31AM

Comments

Brian, it's helpful to look at absorption rate, as well as Days on Market; properly presented, and priced properties will get interest and offers.

Posted by Carol Zingone, Global Realtor Based in Jax Beach, FL (Berkshire Hathaway Home Services Florida Network Realty) over 2 years ago

You should also include houses that are "under contract / pending sale" in your overall calculation of active properties when you're doing your absorption rate math.  Active + UC / Sold is how I calculate my rates.

Posted by Brint Wahlberg, The Wahlberg Team (Windermere Real Estate) over 2 years ago

Hi Carol,

Absolutely agree...although, Days-On-Market is a very sketchy figure that needs to be analyzed for each specific listing, in my opinion. But, both are running averages, so trend line indicators, indeed.

Thanks for reading!

Posted by Brian Morgenweck, Broker/Owner, GRI, CRS, ABR, SRS (Power Realty Group, LLC Bergen County, NJ ) over 2 years ago

Hey Brint,

I don't use Under Contract/Pending since I'm not concerned with those figures. Absorption Rate establishes a trend line for info on Sold/closed properties, or fully absorbed (like Bounty!). Especially these days, when stats as high as 33% of contracts failing are being clocked nationally. It'd just throw way too much elasticity into the mix.

Thanks for reading!

Posted by Brian Morgenweck, Broker/Owner, GRI, CRS, ABR, SRS (Power Realty Group, LLC Bergen County, NJ ) over 2 years ago

I do think it's part of the calculation though, many local appraisers in our market consider them because in one way or another they do play a factor.  Many turn to solds while others return to the market.  Since they're as of yet unsold but still represent listed properties I include them as part of the active market.


It always makes my rates a little higher but I personally feel that using them gives a better picture of the entire listed market vs what's sold in the given timeframe. 


I get what you're saying though, thanks for the reply!

Posted by Brint Wahlberg, The Wahlberg Team (Windermere Real Estate) over 2 years ago

What's SOLD was under contract at one time. Just because a property is under contract however, doesn't mean it will close. (Calculate Liquidity for the "odds" ratio.) If there's ample data to calculate definitively, why stretch into areas that would tend to mislead a bit and not give the truest picture possible? When there's no current data, an appraiser will stretch the geo-lines a bit as well. It doesn't necessarily lead to a clearer picture, though.

Take a longer time frame, then. SOLDS in 1-3 months... 4-6 months... 7-12 months. (or find the % of contracts that fail in a market... say fell out of attorney review or Back On Market due to a wealth of unfortunate reasons...)

If pure data is available, use it, or I don't consider it truly "absorbed".

 

Posted by Brian Morgenweck, Broker/Owner, GRI, CRS, ABR, SRS (Power Realty Group, LLC Bergen County, NJ ) over 2 years ago

Absorption rate is really important to explain to buyers and sellers when they are entering the marketplace.  In our market, we have 1.9 months of inventory.  Buyers are having to get very competitive to get their offers accepted.  Gone are the days of asking tons of closing cost help, home warranties and other items from the sellers.

Posted by Chris Ann Cleland, Associate Broker, Northern VA (Long & Foster REALTORS®, Gainesville, VA) over 2 years ago

WOW, Chris Ann! That's great news for your sellers! Hopefully, your area's condition is contageous!

 

Posted by Brian Morgenweck, Broker/Owner, GRI, CRS, ABR, SRS (Power Realty Group, LLC Bergen County, NJ ) over 2 years ago

Participate