What is an Absorption Rate?

The Absorption Rate measures the relationship between a real estate market’s supply and demand.  The total number of available homes (inventory = listings and pending sales) is divided by the total number of homes sold in the previous month.   The resulting number represents the number of months it would take, at that same pace, to sell the entire inventory of homes.  It this does not take into count the number of houses which will eventually come on the market in addition to those already for sale.

Knowing your area’s Absorption Rate (AR), can help you track trends.  Understanding your market and where it is headed is very important for both sellers and buyers.  It allows buyers and sellers to understand better why some homes may sell faster than other and to develop effective pricing strategies.

Calculating an AR is not difficult but you will need access to the following information:

• How many listings are currently on the market in a given area? Be sure to include both active and pending homes.
• How many homes sold last month?

Once you have those numbers, you will need to:

• Add the number of Active/Pending Listings together
• Multiply the number of homes Sold Last Month by 12.  Then, divide that number by 52 for the weekly number of homes sold.
• Then, divide the number of Active by the number of sold per week
• This will give you the weekly AR.  For a monthly AR simply divide the weekly AR by 4.

Here’s an example for Montgomery County.  In November 2011 there were 554 settled sales.  Currently, there are 4,481 active listings and 230 pending sales.

Listings + Pendings = Actives

4481 + 230 = 4711

Homes Sold  X 12 = Annualized Sales

554 X 12 = 6,648/52 = 127.85 Week

4711 / 127.85 = 36.84 Weeks

36.84 Weeks / 4 Weeks per month = 9.21 months of inventory

The result is an Absorption Rate of 9.21 Months.  What this really means is that it will take 9.21 months for the market, at the current rate, to absorb the current inventory of homes.  This assumes that no new homes will be added to the existing inventory.

One good thing about absorption rates is that they can be tailored to specific neighborhoods and price ranges. So how can an absorption rate study assist buyers and sellers?

Narrowing an absorption rate study to a certain type of home, in a specific neighborhood, at a particular price point, enables a buyer or seller to first determine the nature of their local market (is it a buyer or sellers market) and then establish a listing or offer price, accordingly.

For instance, in Lower Merion, the overall AR for the township is 8 months.  However, if we take a look at the luxury market within Lower Merion (homes over \$2MM) we see a very different picture begins to appear.  The luxury market currently has a 44 month inventory.  Meaning if you have a luxury home in Lower Merion, it could take over 3.6 years for you to sell it.  This could be a problem for someone who needs to sell quickly.  In this case, having the AR could prompt the seller to rethink their asking price.

Once we know the AR, we can determine what kind of market we are in.  That information can then be used by sellers to price their homes more effectively and hopefully reduce days on market.  For buyers, this information can help you determine if you are in a Buyers or Sellers Market and to structure your offer, accordingly.

Buyer’s Market: Over 7 months of supply
Balanced Market: 5 to 7 months of supply
Seller’s Market: Less than 5 months of supply

The AR is not the only thing you will need to determine a market’s condition.  Specific property features, condition, location and of course price will typically be more important in determining how fast a property will actually sell than any statistical formula.

If you have any questions about Absorption Rates or need assistance calculating the AR for a specific market or property type please feel free to contact us through this blog or email us at appraisals@coyleappraisals.com

Chestnut Hill Luxury Market

Recently, The Coyle Group, LLC Real Estate Appraisers & Consultants completed an analysis of the Chestnut Hill Luxury Home Market from January 2000 to the present.

In our analysis, the Luxury Market was defined as the top 20% of single family homes sold in Chestnut Hill. Only sales listed in the MLS were part of the analysis. Private sales and sales occurring outside of the MLS listings were not included.

There were a total of 1,186 single family homes sold in Chestnut Hill since January 2000. This figure takes into account all price points. The top 20% (totaling 237 sales) were included in this analysis as the Luxury Market. Below is a graph of the sales activity that was tracked along with a trend line that illustrates the overall trend for the Chestnut Hill Luxury Market over the span of more than 9 years.

The bottom of this segment began at \$675,000 and topped out at \$3,300,000. The average sale price over the entire time period was \$1,060,840, with a median sale price of \$912,000.

One of the metrics that were tracked was the List Price to Sale Price Ratio. The cumulative average LP/SP ratio was 96.14%. This means that, on average, since January 2000, homes in the Chestnut Hill Luxury Market have been discounted approximately 4% from their most current asking price. The time period with the most full or over full price sales was between 2004 and 2007, totaling 53. The time period with the fewest full price sales was from January 2008 to the present. In that period, there were only 9 sales that went for full price.

Observing the trend line, the Chestnut Hill Luxury Market appears to be leveling out from the highs of 2006-2008 and more recent declines through the end of 2008 thru 2010. The trend even shows signs of incremental upward movement. This is positive news for this market. However, looking at the historical data the current market is roughly in line with the market from Spring 2005.