Absorption Rate – Defined

Throughout this website and blog, the words Absorption Rate show up, in texts of posts and as titles of four unique and dynamic reports available to you anytime you visit here.

What is Absorption Rate and how is it calculated? And what does it mean?

I am glad you asked!  Absorption Rate is a calculation based on sales of homes and inventory of available homes listed for sale. First, I use only data available in the Santa Fe Association of Realtors that is managed through a proprietary program known as Paragon.

Every month I research the inventory of homes listed for sale. This number (in various price ranges) is saved and I have approximately a 15 year history of those numbers from every month. Next I determine how many sales were reported for the most recent 12 month period. This would be a rolling 12 month count that is updated monthly. The newest month is added and the oldest month drops off. Make sense so far?

Then I come up with an average number of homes that sold in the prior 12 months. That number is then used to calculate how many months it will take for all currently listed inventory to sell based on how many sell, on average, each month.

What is means is: if the Absorption Rate in a price range is longer than 6 to 8 months, any real estate expert will likely tell you that it is a buyer’s market and that buyers have plenty of inventory to look at while shopping. This is a disadvantage to sellers as they are competing with many other homes and theirs must stand out in order to be selected and purchased. Price is usually the # 1 factor for a buyer, but condition is very important as is location.

The higher price ranges in our market area tend to be buyer’s markets. The lowest price ranges tend to be seller’s markets, where the seller can expect to get favorable (to them) offers and terms.

Look at any of the spreadsheets and charts available here and you can see how trend lines and seasonal fluctuations show up. Lately inventory is up and sales are down. Take a look when you have time.

Thanks

Comments are closed.