Allow myself to introduce… myself.
That is pretty much the feeling I get when trying to explain a real estate absorption rate to someone for the first time.
In the end it’s a very simple concept, as long as you understand the two components and how to apply it to your situation.
The formula: # of Active Listings / # of Listings Sold per month = Absorption Rate. In the St. Joseph example below the calculation is: (20 sales/(33 sales/6 months)) = 3.6 Months of Supply.
What it tells you: The number of months it would take to sell all of the current inventory for a given criteria if the pace of sales remained the same. (It does not account for new listings coming to market or shifts in market demand.)
What is Means: The absorption rate gives you a way to measure a buyer vs. seller market and overall demand. Traditionally, a result of less than 5 months of supply is considered a Seller’s Market. More than 6 months and you are in a Buyer’s Market. A balanced market runs between 5-6 months of supply and signifies that neither the home buyer or seller has the upper hand.
What to Remember: Absorption rates only look at the past. They are a great measure of past activity but you have to pay attention to the current factors affecting home values. A great example is the upcoming Spring market. It is sure to cause some changes to the absorption rate.
Take a look at the two charts below to see absorption rates for houses and other single family properties (zero-lots, condos, coops).
The absorption rate for a houses in Champaign County is almost in perfect balance with 5.6 months of supply. Condos/Zero-lots are very similar with 5.4 months of supply.
St. Joe and Savoy stand out in regards to demand with less than 4 months of inventory in each market. Both areas are currently very low on inventory of available homes. I fully expect the number of homes to increase this Spring but so will the number of buyers. It’s good to be a homeowner in Savoy and St. Joe! Mahomet and Champaign are basically balanced and Urbana slightly favors buyers.
The condo/zero-lot market in Urbana is the only standout you can label as a Buyer’s Market with 9.6 months of supply. Currently, there are a large number of new construction condos in Waters Edge subdivision near Stone Creek Golf Course impacting this segment. These units are selling fairly well though and I would expect the absorption rate to drop as they work through the inventory.
Think “Spring Real Estate Market” and you can imagine a change in overall market activity. This should show up as decreases in the absorption rate for each of these communities as the number of sales increases.
Taking into account the changes in the market throughout the year will have a huge impact on the sale price of your home. It’s incredibly important that your agent understand these changes on a higher level than just “more homes sell in the spring than the fall so… you should sell then.” If you can understand the differences in demand for different segments of our market, as specific as individual neighborhoods, you can really make a difference in the purchase price. This goes for buyers and sellers.
Questions on Absorption Rates?? It’s a very useful tool when combined with an overall property valuation.
View a quick report on actual home sales in your neighborhood or let us know if you have any other home valuation questions.