01What is Absorption Rate?
Differentiating your services in your market can take you out of the pack of real estate people and gain business.
So, what is absorption rate? The sponge image helps to illustrate the concept. If you have water leaking into your home and you're sopping it up with a sponge while you look for a bucket, your sponge is "absorbing" the incoming waters.
The rate at which the sponge can absorb the water is the absorption rate. The sponge represents buyers or closings of sales. The leak is the entry of new listings on the market. If the leak gets bigger but the sponge doesn't, then we get a lot more water on the floor, or more listings sitting unsold. A bigger sponge will absorb more water, so more buying will keep the leak at bay.
So absorption rate in real estate is the rate at which homes are selling (the sponge) as compared to the number of listings on the market (the leak rate). It's all about supply and demand, which rules all markets. Let's look at the differentiation angle next.
02Your Competition is Mostly Lost
We talk a lot about becoming a recognized real estate expert in your market to build business. I did a couple of Google searches, one on Houston and one on Denver, and the words "real estate absorption rate." In each one of the top four organic results listings was a real estate agent/broker.
We all know how it's almost impossible to get onto the first page of Google searches for most real estate related key phrases until you get into really "long tail" searches, for specific neighborhoods as an example. However, if you assume some of your prospective buyers or sellers will understand absorption rate, it's easy to get top listings in searches.
While your competition is having a hard enough time with CMA calculations and other real estate math, you're taking a short 15 minutes or so each month to calculate the absorption rate for your market and put it up on your website.
Here's another value in doing this. Putting this somewhere prominently displayed on your home page with a link explaining what it means will definitely set your website apart from the competition. You'll be educating your site visitors while sealing the deal that you're a true local market professional. Next, let's look at how to do this simple calculation.
03Calculating the Market Absorption Rate
You're about to learn a really simple calculation that few of your competitors even think about, and it's going to position you as an expert to your prospects and website visitors.
The local market absorption rate is the amount of time it would take to sell all of the current listings at the current selling rate if no more homes were listed. Some real estate websites have estimated that a "normal" absorption rate is 5 to 7 months. I don't think that's really important information, as every market is different.
In my vacation home market, sales were much slower, with homes staying on the market a year or more being common. The sellers were enjoying vacationing there and usually set prices higher and didn't care if it took a while to sell. The point is that the absorption rate there was much slower. Your market will have its own "normal," and you'll soon learn what that is.
- First, we have choices for the time frame we'll use, but a common approach is to use the past 90 days of sales results. So, go to your MLS reporting system and get a count of the number of closings for the previous three month period. Let's say for example, that we find 1650 homes sold over the past 90 days.
- Then get the current number of listings. For our example, let's say that there are 3600 homes listed on the day we're doing the calculation.
- Now, our 1650 homes were sold over the three months, so divide by three to get the monthly average of 550 homes sold/month.
- Now just divide our current number of listings, 3600, by 550 to get 6.55. This means that if no more homes were listed, it would take 6.55 months to sell all of the current inventory. That's our absorption rate.
It really isn't hard to do and takes just a few minutes. But it tells us a lot about our market over time. It can also give hints as to what may be happening in the short term. You see, if you've been doing this monthly for a while with absorption rate results between 5 and 7 months, two possible changes could signal problems or opportunities:
- If this month our absorption rate suddenly drops to 4 months, it means homes are selling much faster or there are fewer new listings coming on the market. Either way, prices may be about to rise in the short term, so you may advise a new seller to up their price a bit.
- If suddenly the rate rises to 8 months, it's a different story. Now you have either a burst of new inventory or a drop in buying pressure. Either way, prices may be about to drop a bit due to this imbalance.
A smart real estate agent has his or her finger on the pulse of the local absorption rate, and their business will be all the better for this insight.