What is an Absorption Rate?

A little housekeeping; and explanation and definition of a statistic I throw around freely – Absorption Rate. Every month I post four spreadsheets that show a direct comparison between the number of homes for sale and the number that have been sold in the last 12 months. This illustrates the length of time it may take for a typical home owner to sell his or her home, given today’s market conditions. If the rate of absorption for homes under $500,000 is currently running about 12 months, that means that at the current rate of sales, it would take that long for the entire inventory of homes listed for sale to actually sell. The analysis is for single family, condos, manufactured homes and townhomes in Santa Fe County, New Mexico. Not included are mobile homes or multifamily homes (duplexes, quads, etc.).

But we know the world does not work that way. New homes come onto the list of inventory all the time, and other homes sell and come off of the list. The home you are concerned with might sell in 30 days  or still might be for sale in 18 months. Unfortunately the number of sales has not kept up with the number of homes listed so we say our market is unbalanced; it is currently considered to be a buyer’s market. When there are very homes a potential buyer can choose from, that would be a seller’s market. The difference is which side is in a more powerful position in negotiations. Right now, buyers have all the power. So if you are trying to sell your home and its listed for sale at $425,000 (in that price range mentioned above) can you realistically expect it to sell in 12 months? The easy answer is yes. But then again it may not sell in 12 months, due to any number of reasons. It may be overpriced. It may not show well, with deferred maintenence and too much clutter. It may be in an undesireable location. In the worst case, every new listing that comes along to compete with you may be superior in various ways and may sell sooner. There is an entirely different chapter of the book that goes into detail on how to position your Santa Fe home to sell.

The math for calculating Absorption Rate is as follows:   On the same day each month (I use the last day) I run a report that provides the total inventory of homes for sale in various price ranges as of that day. Then, about 7 or 8 days into the next month, I run another report that provides the total number of sales in those same price ranges for the previous 12 months. So in the next few days, as an example, I will post the inventory numbers I pulled on May 31 and then will add the sold figures (from June 1, 2010 to May 31, 2011) for the previous year. The total sales for the year is then divided by 12 to get a monthly average and then that is divided into the total inventory. It is simpler than I am making it sound.

What this sort of review does is level off the extremes of a really good month or a really bad month. The resulting caluculations are sensitive enough to reflect improving or deteriorating market conditions yet still show a relatively long term view. You should know that if you are just dying to get that really good month into the statistics, and not include that miserable month, then you are manipulating them in order to mislead people. Persoanlly, I do not want to do business with someone that is trying to mislead me. Removing the best and worst month is good practice when looking at data over an extended period of time. If the facts do not support your agenda, either get a new agenda that matches the facts, or measure something else that makes you look better than those lousy old  facts support.

In the spreadsheet for the price range of $500,000 and below, the absorption rate never did climb above 18 months, meaning that housing in that range was not as severly affected by the real estate downturn as other price ranges (they went to much higher numbers). Now hovering around 12 months, we have returned to the approximate level from 2008, when the market was entering its worst two year stretch ever. For almost all of 2009 and 2010, we languished at the bottom andsince then things improved a little. To put current absorption rates into perspective, 12 months is not wonderful; it is an unbalanced market still strongly favoring buyers. A good number that might reflect a level playing field between sellers and buyers would be around six months.

If we can move a little closer to the six month figure and consistently move in that direction with incremental improvement each month, then maybe we can declare victory and move on. That day is likely still out there. Will it arrive in 2011 or several years from now? Nobody who says actually knows and those not saying are too afraid to be wrong. In the meantime, we have some inventory to get rid of. Know anybody that wants to buy a house? There are some fantastic deals out there.


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