Absorption Rate Reveals Strategy for Pricing
100 Real Estate and Relocation Tips in 100 Days (Day 16)
The absorption rate is the length of time it would take to sell the inventory of a given area at the current sales rate.
Here's how absorption rate is calculated:
- Take the number of homes currently on the market (Active inventory);
- Divide that figure by the number of homes sold last month: and
- The resulting figure is the absorption rate (based in months to sell)
As a Seller
The absorption rate is very important to know, since it tells something about how long it might take to sell the home. If the number of months if very low, it could also indicate the market is in a SELLER's market, therefore pricing the home at the higher end of the range might be will justified.
Conversely, if the number of months is high, the seller will need to price at the low end of the range (or even below the range) to realize a sale in a shorter period.
Buyer's also need to be aware of the absorption rate. If the market is swinging into a time of low inventory, then they must realize bidding lower on a home just won't work. When intentory is low and buyers are prevalent chances are the buyer will be introduced to a situation where the home has multiple offers on it.
Conversely, if the absorption rate is very long, chances are the buyer will have time to successfully offer a lower price without fear of competing offers.
The real estate market is called such because it is a market. It changes with the amount of homes available.
With a changing market, the rules change as well.
Buyers and sellers who pay attention, will ultimately be the winners. It's just one more reason to work with a broker who understands the current market conditions and can assist in preparing a successfull bid or listing of your home.