Tuesday, April 3, 2012

FANCY WORDS REALTOR'S USE -ABSORPTION RATE

    Realtors like to use really big words when giving a listing presentation or discussing real estate, so I am here to take the mystery out of these terms and to help you understand the concept behind a few of  them.  It will have the added effect of shocking the next realtor you run across.

Big Word # 1  Absorption Rate

Remember your Economics 101 class when the teacher went on and on and on about supply and demand?  The absorbtion rate is the real estate measurement for supply and demand.

Hold on to your head - here is the formula:

Absorption Rate = measurement of current housing supply divided by the current rate of sales per month.

Okay, you say that wasn't so bad. You have that number, now what does it mean?
  • A normal market is equal for both the buyer and the seller when the absorption rate is between 5 and 6 months.
  • A seller's market is when the absorption rate is  low -  between 1to  4 months
  • A buyer's market is when the absorption rate is high - over 7 months

Step 1: Here's an example using  Waconia, Minnesota, on March 25th, 2012

Waconia, Minnesota  had 74 homes currently on the market
In the past month  9  homes sold
This means it would take 8.22 months to clear current inventory and it's a buyer's market.

You are so smart :)  But wait  a minute, let's add another level to the equation.


Step 2: We must look at specific geographic areas and  the price-ranges for this number to mean anything about your particular home.

The county-wide absorption rate needs to be compared to school district housing figures and/or municipality housing figures.


 If there is a lower absorbtion rate number for particular school districts or  municipalities as compared with county wide absorption rates, then one can assume that these are desireable places to live in the county.

You can furter beak down the absorption rate by price-range, for example:

  • under 300,000
  • 300,000-500,000
  • 500,000-800,000
  • 1 million and up 

One might ask, where do I get these figures?  Your realtor pays monthly dues to have  access to housing statistics through the MLS or other real estate databases. You can get the information through county tax records, but it's  a time consuming process.

The absorption rate is the supply and demand of a particular area. Failure to look at the absorbtion rate when buying or selling a house may give an unclear picture of the market. The absorbtion rate can help buyers find the correct price for a home and help seller's price a home correctly. 


Any questions?

 Just call, text or send me an email I would be happy to show you the absorbtion rates relevant to your home.