So what is an absorption rate??

When I’m looking at a market to see if it’s leaning toward buyers, sellers — or neither — I look to the absorption rate. This means how long would it take to deplete the inventory at the rate that homes have gone under contract in the last 30 days. (Huh?)

Here’s my simple equation — if there are 100 homes on the market in a particular area (county, zip code, etc.), and 50 houses went under contract in that same area in the last 30 days, the absorption rate would be 2.0. Meaning, at the rate they’re going under contract, it would take 2 months to absorb the current inventory if no other homes come on the market.

Absorption rates tell a story — is it a buyer market, seller market or a market in equilibrium. A seller’s market is any absorption rate BELOW 3 months supply. A normal market would be BETWEEN 3-5 months supply; and a buyers market is any market ABOVE 5 months. (The accompanying graph from Cardinal Realty in Iowa City, is a perfect example graphically of how this works.)Absorption-Rate-Graphic-1[1]

The interesting thing in measuring these rates is that you can have a buyer AND seller market occurring at the same time, depending on the type and price of properties.

So what does that mean to you? Simple – when the market starts to shift, get aligned on your pricing (for sellers – bite the bullet and drop it!); for buyers, it means you can now come below asking price and get some closing cost assistance. But it’s all about the absorption rate in your price range, location, and property type.

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Until next time…