You may have heard the term “Absorptions Rate” before but not really know what it means. The absorption rate is a measure of how long it will take to sell the current inventory of homes in a given market. This market can be on a large scale such as for the entire country, or it can also be calculated on a state, county, city or even on a neighborhood level. In addition, specific property types or house styles may have a different absorption rate. By calculating the absorption rate you can determine what type of market you are in. You can determine if the market is oversupplied, under supplied, or in balance.
Absorption rate is calculated by taking the number of homes that are currently listed for sale, and under contract, and dividing it by the rate of sales for a given period. This figure will tell you how many months of inventory there currently is. Different areas vary but anywhere from 4-6 months is considered a balanced market. Anything less than this would be a sellers market because there is not enough inventory to satisfy demand and anything more than 7 months would be a buyers market because there is too much inventory. As we learned in basic economics, when there is an over supply prices tend to decrease.
Today I wanted to share with you my findings for the Pelham, Alabama area. Remember that submarkets of Pelham, such as individual subdivisions, can and will vary from what we are looking at today, but the method of calculating it is the same. The Birmingham Association of Realtors shows that as of the writing of this article there are 161 conventional single family homes (not including townhouses, manufactured, or condos) for sale. From December 15, 2010 to December 15, 2011 there were 222 homes sold. I am using December 15 as my date of reference to make sure that the sales figures have been entered. If I would have used today’s date, some sales may have been left out because they were not recorded. The method of calculation would be as follows:
Active + Pending = 161 homes (current inventory)
222 sales / 12 months = 18.5 homes sold per month (rate of sales over last 12 months)
161 / 18.5 = 8.70 months of inventory
As you can see, Pelham as a city, is experiencing an oversupply of homes because if no more homes are added to the inventory it will take approximately 9 months to sell every one of them. As noted previously, anything over 6-7 months is considered an oversupply. Appraisers consider this statistic when looking a the supply and demand in an area, especially if the appraisal is being performed to set an asking price. If there is an oversupply then it would be logical to price it lower to compete with the other homes. If there is a shortage of homes on the market then the seller has more leverage when asking a higher price.
Of course there are other things to consider when determining a markets condition. Things such as specific property features, condition, location, and price will determine how long it takes to sell a home. Do you know what the “Absorption Rate” is for your subdivision or neighborhood? If you need help determining a selling price for your property give me a call I would like to speak with you. Next post I will narrow our analysis down to the subdivision level and look at one subdivision in Pelham that has shown strong sales in 2011.
If you have any real estate appraisal related questions you can call me at 205.243.9304, email me, or connect with me on Facebook., Twitter, or Youtube.
Related posts:
- A Look At The Absorption Rate In Pelham, Alabama, Ballantrae Subdivision-Pt. 2
- Signs of Real Estate Life In Pelham, Alabama-Ballantrae Subdivision
- What’s Happening To The Townhouse Market In The Alabaster/Pelham/Helena Area?
- A Look At The Market For Lake Front Homes In Shelby County, Alabama in 2011
- Shadow Inventory-What It Is And How It Affects You
Very well explained! I do wish this were more readily understood by sellers – ties in so neatly with the “my home is priced right but for some reason it isn’t selling” problem.
Thanks Alison! Hopefully we can convey this very important statistic to buyers to help them understand how it relates to their list price and demand in the area.
Baton Rouge Real Estate Housing News – Absorption Rates Answer How Long It Takes To Sell Baton Rouge Real Estate // Jan 3, 2012 at 11:27 am
[...] A Look At The Absorption Rate In Pelham, Alabama, Pt. 1 By Tom Horn, SRA [...]
Hey Tom~Happy New Year! I hope your holidays were great. I always like seeing numbers like this from different parts of the country. Several of the last appraisals I’ve done the inventory levels has been at 2-3 months. I sure hope everyone is wrong about that shadow foreclosure inventory.
Thanks Michael, my holidays were great. I agree, it is interesting to see housing statistics for other areas of the country. The figures for the town of Pelham were a little different that what I found in one particular subdivision. That will be the topic of my next post. Initially the shadow inventory was a lot higher than what they are predicting now, hopefully it won’t get any worse.
It would be interesting to have a map of the US and for each state indicate the current absorption rate. I wonder if you’ll find a pattern by region, etc.
Thanks for your comments Ramir! That would be interesting to see a map of the nation with the absorption rates. I’m sure it would mirror unemployment and foreclsoure rates since these two stats are tied to home sales.
If I was a business owner I would want this kind of information as it would allow me to decide where to focus my efforts regardless of what industry I am in.
Good point Ramir. Do you have any particular industry in mind and how it could be used?
This is a great post, Tom. Well done!!
Thanks Ryan, I appreciate that.