Robin's Nest

Great Post! It's a crucial point that we need to reiterate.

Easy to follow, and a valuable tool !

Excellent !

What a good post!  Impressive.  Since real estate is a 'me too' business (i.e., I have a blackberry; me too, I Twitter; me too, I have a blog; me too . . . etc. and so on), I'm going to "me too" these two words:  Absorption rate!

It sounds SO impressive!  I meet with potential buyers tomorrow, and I'm going to toss into my consult this two word "says all"!!  And then they'll think I'm really smart :-)

THANKS Robin for this.  It makes cents sense!

Robin,

Great concept.  This is something I talk about quite a bit.  This information will also reveal the direction and speed of a market if you track it every month.

I like to look at the number of sales in a 6-month period, especially since in some areas it can vary tremendously. But Isuppose it all averages out the same. Anyhow I report this in my monthly market reports and also talk with sellers about the numbers. I also look at the price range too since high end can be quite different from low end.

Jeff

Hi Robin, excellent post. This is such an important factor in marketing homes and you have written an easy to understand article making it simple for realtors and the general public alike! Congrats on the FEATURE too!

Robin - You put this in such simple to understand language.  I use the absorption rate in my market reports and always have a discussion with sellers about how important pricing is and positioning their home correctly in the market.  Congratulations on that shiny gold star!

Great refresher, Robin - in this economy/market, knowing the current absorption rate is going to be another crucial piece of the pricing puzzle.  The other half of the problem, however, is getting your sellers to understand it and allow their home to be priced accordingly.

Thanks.

Thanks, I needed that refresher course!

The absorption rate makes it easier to have a conversation with a seller about the reality of actually selling the home. thank you all for reading my post.

The absorbtion rate is a great tool with sellers.  I recently showed a seller the local market absorbtion rate and he agreed to a price reduction on the spot AND agreed to offer to pay buyer closing costs.  

Thats not how I figure absorption rate, but it seems so simple. I will try against the method I use and see if the numbers are the same.  Basically,  I take the total number of Actives and pendings and divide that total into the pendings for a percentage of homes that sell within the first thirty days.

Solid, common sense advice Robin, and an easy to use formula to generate statistics that will impress the analytical seller. I look forward to more posts like these!

Robin - Great point !  It is critical to have this info before one takes a listing as the data is really important to determine the pricing strategy.  Thanks for the post !

I find in this market sellers especially like to have hard data....Kelly

Another way I like to look at it is see how many active there are and divide that into the number of current pending listings. (since pendings usually close in 30 days, its like # of solds per month)

I like the term absorbtion.  There are so many good ways to guage the market.  Thanks

I like the term absorbtion.  There are so many good ways to guage the market.  Thanks

Finally, a straight forward way to calculate the absorption rate and one that is easily understood.  Thank you.

Simple, direct, excellent post.  Did I mention that that it was to the point??

Robin - Nicely done.  Easy to follow for any buyer or seller.

Thanks this is really good info to have. I went on a listing presentation earlier but this was easier to say.

A great thing to do with absorption rate is to calculate it for 12, 6 and 3 months.  Then you can see (and show) whether it is an acceleratiing market, or a decelerating market.  Also, having historical stats can go a long way towards graphically illustrating how the market is changing. 

Absorption Rate Pricing is about the only way to even begin to think about pricing any more!

Hi Robin --  I have used absorption rates for the past few years, and have found they can provide a false sense of security as they indicate general trends, etc., and changing the "condition" equation of a property via home staging, redesign and/or minor or even moderate renovation, coupled with the unique aspect of certain properties, can largely invalidate things, as all real estate is unique and local.  Moreover, there needs to be enough sold homes to really make it relevant, and in changing markets, even looking at shorter horizons coupled with the lack of robust sales, can render this analysis marginal.

I used to be a big fan of it, but anymore, I don't find it as useful.

I use a variety of techniques and then see how they all inter-relate.

I did an absorption rate analysis for 3 homes I recently sold, 2 of the 3 sold in multiple offers, and the expected time on the market for this submarket for the 3 homes was (9, 14, 20) months, and we sold them in (2, 4 and 5) months, respectively, at much higher lp/sp ratios.  So...I have learned to qualify everything I present to say: "your results may vary" LOL

Great post! I go in armed with absorption rate and all the active competition. That's all you need to get them working toward pricing right. Throw in national stats, local stats and neighborhood stats and you are golden. That's giving your client what it takes to succeed in a challenging market! You go girl!

Your post is very informative and so is comment #25.  I don't think any one pricing method works on every property.  You need to know your local market and use the tools at your disposale to come up with an effective price.

Thanks for simplifying this!

Robin,

Great post.  Short and sweet.  But I think it may have left the impression that you are advocating absorption rate as the only tool for pricing a home.

I'm sure most Realtors utilize all the tools in their toolbox when speaking with a client.

Take care,

John Keene

Great info and clear to understand for those of us that like to see apples to apples!  Thanks for sharing

Robin, this is a very succinct explanation of this term. I agree with Chris that the absorption rate is only a gauge but it is useful information to give to Sellers to help them select the proper listing price so they aren't chasing the market down.

Robin,

Terrific and simple explanation to an otherwise very mysterious statistic that very few agents seem to use or talk about these days!  Take care and happy blogging!

Robin: Great information. Very simple calculation to find this information.

Shazam! Thanks Robin. I needed more material for my blog! My first post about Cambridge Farms, a local subdivision ranked #3 on the first page of google. AR amazes me! Now I have a new topic, maybe I can bump the builder off the first page of google! Yay Google Juice & AR.

Robin, Good to know, thanks for sharing this formula in an easy to understand way.

Hi Robyn.  You have explained this very well.  I learned this in one of my CRS classes and you would be surprised about how many seasoned agents don't know what I am talking about when I bring up absorption rates.  :-P

Hi Robin,

I agree with you. The absorption rate is a great tool for measuring how active and vibrant the market is. But I'm not sure that the way you are calculating it is yielding you the most accurate results. By taking all sales over a 12 month period and dividing by 12, you're calculating an "annual average" of sales for the month. But the market is a dynamic and changing place. In some months sales activity is significantly different than in other months. Sometimes it's the cyclical nature of our business, Some months it's because of changes in lender credit requirements. Currently, I'm finding that sales activity is tempered by local job insecurity. I think that a better way to come around on absorption is to calculate the sales over the previous month and then divide this number into the active inventory. You'll get a more precise number that takes into account what's happening in "real time". Then, you can use your market knowledge to help the sellers understand why the current absorption is what it is, and what they should do to properly position themselves in the current marketplace.

Absorption is a great stat to know and use when you talk to your clients. It's surprising how few agents use it. Thanks for bringing attention to it here...

Robin - Thanks for the timely post.  In the last year or so, I've only been going back 4 to 6 months on the absorbtion rate (instead of 12) because of this rollercoaster real estate market. 

I'm sorry, I think I miss a step.. for the Absorption rate:

I usually take the number of active homes .....divide my the number of homes sold within a month.. then that number tells me how long it wil take to sell a home.. 3-10 months.. for that area....

Thanks for showing me a another way to do this...

I regularly post the absorption rate for area markets where I work on my flagship site blog. I find it goes a long way towards helping both buyers and sellers understand the "speed" of the market, how long they can expect to wait to sell, and - as sellers, how they can change that with pricing when they list. Great post.

Good information. Thank You!

Great topic and you did such a great job at the explanation.  Because my local market continues to experience big changes, I have switched to using sales from only 90 days back.

Robin, that's a great topic, thank you for explaining it so clearly.  And great job on getting your GOLD STAR!

Thanks for that great tip, Robin!

Hi think Chris raised some interesting points.  When the market is slow and there are not a lot of sales, it can be misleading to use the absorption rate.  Also, different price ranges can make a big difference -- so while it is a tool, often further analysis may be warranted depending on the particular market.

Normally true, but when a market makes a major turn, going back 12 months throws off the data considerably. In this market I would go back no more than a quarter.

What great comments. The formula is just that - a formula. If it makes more sense in your market to only go back 6 months than recalculate with 6 months instead of 12. I agree with Tim, going back a quarter is good for today but remember to readjust when the market readjusts. When it heats back up, a quarter will probably still be best but when it's stable think about what makes sense.

Thanks Robin. It IS a great figure to use with sellers. For example, if the absorption rate is 10 months (not good) you can show the seller the figures and say, "Only 10% of homes like yours are selling each month so you should be priced pretty close to the 10% of best priced homes on the market to give yourself a realistic chance of selling." A side note...I usually only go back 3 months too. 

Robin, wow! This is math that I can understand! I'm going to use this. Thanks, Deb

I am very sorry to disagree with you on this one. 

While the general concept is good, I find that with a market as volatile as ours, sales from 12 months ago have absolutely no relevance to today's market.  Instead, I extract the absorption rate monthly, for a current and accurate absorption rate.

How many properties sold last month?        10

How many properties do we have on the market?   240

That is an absorption rate of 24 months.

This is just as easy and a lot more pertinent to the current market.

I don't know about your area, but if I was to use the general absorption rate from 12 months ago, I would lead my clients to make a grave mistake.

I just saw your comment where you are acknowledging this point.  I was glad to hear that you were in agreement with Tim about using a shorter time frame like 6 months.  I am with Tim though on the quarter as the encapsulation vehicle for today's market. 

I still prefer to do it monthly, but I know that when my investors want me to give them figures they usually ask for quarterly activity.  

I like extracting all my figures monthly because I can also go back and compare July of this year with July of last year and the one before.  Our market does have some seasonal patterns, so that helps me to really understand our precise position.

I wish you would mention this smaller encapsulation in your blog, since it is very popular and it got re-blogged several times.  Some agents might take your formula literally and actually go back 12 months. 

Good post though, in spite of my disagreement on this one point!

I especially like your ending:

If that number- the monthly absorption -  is too high, you will need to undercut the competition by making sure the home is show worthy and pricing the property lower than the average price from the beginning. It doesn't help to price it high to see if it will sell and then reduce the price. You will always be chasing the market down. If it's priced right you will be more likely to get an offer sooner and save money by selling rather than hanging on as you continue to make payments and lower the price to catch up. the key to selling a house is the price. PRICE IT RIGHT.

Robin,

Now I got that elusive absorption rate down pat. That's what the real estate market is all about today, price it right and it'll move. Otherwise, good luck.

It might help to add the ideal rate is 6.  Over is a buyers market, under is a sellers market.

My market runs 8.8 right now....not too bad.

Great post and another useful tool for measuring this volatile market.

Mirela, I'll take your advice and add the option to change the term.