When looking into real estate either as an investment or as a first home purchase, you’re bound to hear an agent or a broker throw out the term “absorption rate”. An absorption rate is a fairly common market indicator that can help you know when the best time is to list your house on the market, and can help you predict the sale price of a home in a given market.
What is an absorption rate?
Simply put, an absorption rate is the total number of months it takes to sell currently listed homes on the real-estate market.
When you put a market value on selling your home, you know that it may be logically more, less, or the same as when you purchased it. The absorption rate compares your home against others in the area in terms of supply and demand. Is your house a hot commodity, or are there better homes out there right now holding up your sale?
If the rate of absorption on the homes around your area has slowed down, then you should lower the listing price. If the rate has increased, then you can increase the listing price and reap the rewards of a bigger sale.
While the math is fairly simple, remember that the real estate market changes almost every day, so it’s best to keep up-to-date information about your local absorption rates. Most calculations will take into account about six month’s worth of home sales.
How do you calculate absorption rate?
Let’s create a couple scenarios for calculating absorption rate:
Let’s assume that in a larger urban area, like Atlanta, a hypothetical record of 32,550 houses were sold in the past six months.
Dividing 32,550 by 6 (months) would tell us that the average number of houses sold per month was 5425.
If there are 25,000 homes on the market right now, then we can divide that by 5425, giving us a 4.6 month supply for homes in this market. Homes may be added or taken off the market, but this roughly gives us the absorption rate of a little over four and a half months to sell your home.
You bought your home fifteen years ago for $400,000 and would like to ask more than you bought it for after years of renovations, fixes and additions.
You’d like to ask $485,000. Let’s see if that’s feasible and how long it should take to sell it:
Looking at other properties priced at $485,000, you see that over the past 6 months, 20 properties were sold.
20 / 6 = 3.33
You currently see that 40 new homes are on the market currently, with a listing of $485,000.
40 / 3.33 = 12.01 (twelve months)
This means you can expect to sell your house at the higher price of $485,000 in about 12 months.
If you look at the number of homes sold at the original price of $400,000, you’ll see over the past 6 months, 80 homes were sold.
80 / 6 = 13.33
If there are currently 100 homes on the market at this lower price, then:
100 / 13.33 = 7.5 months
Based on this calculation, there is a four and a half month difference from one price to the next. If you can hold off for about five more months, then you stand to make a good return on your investment. The market means you’ll be waiting for upwards of a year to sell your home, but that the price difference is worth the wait.
Want to learn more about absorption rate or get information on selling your home? Contact The Atlanta Homes online or call 404-531-5700 to speak with a member of our team!