Calculating Absorption Rate Pricing
Absorption rate pricing is a method used to calculate the value of your home based on the principles of supply and demand. Because appraisers are now required to use Absorption Rate Pricing to determine your home’s value, it is critical that you understand how the process works.
There are only a certain number of homes that will sell in any market in any given period of time. For example, if 12 homes sold in the last 12 months in a given market, that means that the market will absorb 1 house per month on average. If there are 10 homes currently on the market, there is a 10 month supply.
· A 6-month supply is considered a balanced market.
· Less than 6-month supply is considered a sellers market.
· More than a 6-month supply is considered a buyers market.
To calculate Absorption rate, your Realtor® /appraiser will do the following:
1. Conduct a search for homes sold in the past 3, 6 and 12 month period, which are similar to your home based upon:
location- condition
- size
- features
- amenities
- price
From these numbers, the average sales per month will be calculated. This reflects the demand in the market.
2. Then, they will conduct a search for all active listings of homes on the market for sale which are similar to your home in: location, condition, size, features, amenities and price.
3. The monthly supply of homes on the market will then be calculated, resulting in the average number of home sales per month.
4. In addition, you will need to rank your home compared to the competition in the categories of: location, condition, size, features and amenities. This analysis will help determine the best asking price. If you're in doubt, visit the competitive active listings to see that your home is positioned to sell within the timeframe you've allowed.
5. Based upon the positioning of your home versus the competition's position and the monthly supply on the market, your Realtor® will be able to calculate the odds of selling your home in 30, 60 or 90 days.
Here is an example of a recent Absorption Rate Analysis that I shared with my clients--positioning is everything in today's market!
(THE best Charlotte home search available - no kidding!)
Debe Maxwell, CRS/Realtor®/Broker
Broker@TheCharlotteScoop.com
Phone (704) 491-3310
Very good graph to share with your sellers. Appears that this was done from your MLS system? If so, I wish that ours had this feature available. I can do one but it is a painful, lengthy process to pull all the information together and the results do not look as professional as this one!
Debe. - very good post. I find this very interesting - but wonder that resuults copuld be very misleading if there are a large # of homes that are REOs that are not listed, as the lenders may withhold them - but regardless, this makes sense to me.
Debi, this is excellent. I need to get to used to doing this so that I can do it off the top of my head. It is very new and not well used here in Gettysburg, so it would be a positive for me to become the leader in this area. Thanks again for great information and always a way to become a better Realtor. I have bookmarked this post and will run the exercise every few days until I am prolific with it. FYI RainCamp is coming to DC and I am like a kid at Christmas...
Debe, Excellent post. Super informative and so very easy to read. If your mls provides these stats, that is so helpful because it can take quite a bit to get these #'s.
Very timely for me. .recently I had to present a paper about market equilibrium and I presented an absorption rate for a local community. . this was in a broker's class and I asked everybody to raise their hand if they knew what absorption rate was. .
No one raised their hand. . .
Debe,
Excellent post. Absorption rate is critical in the understanding of the market. Thanks for an easy to understand explanation.
Dixie
Jim: Thanks! No, I do the graphs in Excel after I extract the data from a variety of searches and then color them and post them here. It would save me alot of time too, if our MLS provided this info in one place and in one graphic!
Rick: REOs are included in our MLS.
Gerry: Thank you! It's easy if you just keep the formulas in an Excel spreadsheet--drop the neighborhood information into the form and it calculates everything for you. If you'd like me to email you the template, just shoot me an email at Debe@DebeMaxwell.com
Jeana: Thanks! I do wish our MLS provided this in one clear, consise format--I just extract the data and drop it into Excel and Voila!
Fernando: You know, I learned this a couple of years ago and STILL, everytime I do a listing presentation, the sellers say they've never even heard of this. It truly is eye-opening to most and it helps them realize that my suggested list price is right on the money!
Dick & Dixie: Thank you! To me, this is better information than a CMA--it is more valuable to sellers, for certain!
Hi Pippa! I'll have it ready to send to you! It's VERY simple and the client's just LOVE it!
Hi Debe - With your average DOM from 153 to 240, how did you arrive at 30, 60 and 90 day prices for your client?
John: The positioning is based upon the most recent data (3 months). The 3-, 6-, and 12-month data is provided to show a trend With this area, we're up and down but, as in this example, prices are hedging up just a bit so, the extended DOM may be worth the wait. If a quick move is desired (for relocating clients, for example), I would recommend beating the average on the list price to compensate for the DOM.
Hi Debe,
As usual your explanations make perfect sense. Positioning is everything in today's market and is what I tell my sellers! Your post is clean, concise and to the point..great job!
Debe, excellent post which I am going to reblog. I will need to read if a few times before it sinks in.
Dorie: Thank you and smart girl, you are! I can't emphasize enough how important the abosorption rates are as opposed to they typical CMAs.
Jane: Thank you so much! If you want the Excel spreadsheet explanation, just let me know and I'll send it your way.
Debbie - Great post! Thank you for taking the time to explain it to us. I need to get used to doing this too. I've also bookmarked it so I can go back.
Try telling my buyers that less than 6 months is a seller's market, they've watched too much TV! They think the sellers are going to pay them to buy the houses.
Great post Debe. I'd heard of this a couple years ago, but really didn't use it then. Would love your Excel Spreadsheet to start getting it down though.
Awesome explanation of Absorption pricing! I even had my husband make up an excel graph (he is my excel person) so I can just plug in numbers to demonstrate absorption in an area.
Pricing is both an ART & a SCIENCE and those that dominate the practice will sell their listings quicker and leaving less money on the table.
Last year I had to argue with REO servicers about our market changes. Clarification requests were popping up for me when I was pricing at a stable market.
Pricing below market (which anyone can do) will generate multiple offers and maybe a final price or net above list price - but not necessarily at market value. Pricing above the market will get you less showings and lower quality offers. Pricing at market will bring you happy customers in the end :)
Elyse: Thanks and you're welcome! The spreadsheet will make it so that you don't even have to come back to this post--it's fill-in-the-blank! Good luck!
Loreena: HA! Yes and it's even more difficult when they're not MY buyers and I'm representing the sellers who have received the lowball offers, thinking my sellers are desperate! ARRGH!
Carol: Good luck with it! It's REALLY simple once you've done it once!
Renee: I don't know if you're NINJA-trained or not but, I was immediately drawn to you when I joined! We think ALOT alike! Pricing is most definitely an art and a science and I'm always interested in seeing what other agents presented to those who ultimately become my sellers following the interview process! There is absolutely NO rhyme or reason to their pricing and I won't even call it a 'strategy' either--it's more like they just picked a number out of the SKY! They're either WAY high or WAY low, rarely in between and never an explanation of how they arrived at their crazy price. I love happy sellers and this day and time, pricing is almost more important than location!
Debe
Excellent information thanks for sharing your thoughts.
Good luck and success.
Lou Ludwig
Debe, I think I'll ask for a copy of that template as well. I've been tracking absorption rates on my zip code updates, but I have not yet utilized this method to secure a listing, which it sounds like it has done for you. Thankd for the concise and thorough explanation.
Lou: Thanks for stopping by!
William: You're welcome--email me and I'll get it to you right away. It really does help sellers to see the market trend.
Excellent info Debe. It's fairly obvious to every one invlolved once it's explained (except that sellers just don't seem to get it!)
Great explanation of absorption rates, Debe. And if you're really willing to share your Excel template, I also would love to have it.
Hi Debe ~ My absorption rate analysis is based on the 12 month scenario, I hadn't heard of the 6 and 3 month one, although it makes total sense to do all three. I'm another one who would love to see your excel sheet. I guess I email you next. Nicely expliained. Great post.
Denise
Debe - this is excellent, and explained so well.
It would be hard to argue with the data tha this provides to sellers. Once you have a chart set up in Excel IU would think it's a breeze to fill it in for the particular listings you are going after. Hmmm,, how about a sample that you include in your pre-listing package?
Jeff
Great post, Debbie. So clear and easy to understand. Love the presentation as well.
Hi Debe. Your explanation is thorough, and for me, very timely. I got a call from a FSBO owner last Friday, while on the way to my son's wedding in California. She remembered my coming through her home last year, and wants to talk with me about listing her home now that she is back from snowbirding in the warmer states. This post is going to be so helpful. I, too, would love to see your template. Thanks in advance.
Debe: What a great post! How do find the time to do this and deal with all your business?! Impressive!
Was this featured? It should be!
=)
It is a shame how many realtors just use the "Quick Comps" available through the mls. We always do absorption, price per square foot and percentage of sold price to tax assessed value ratio. If you do all that you look good compared to the competition and if the seller wants to fight on price.......what is he going to base his numbers on? Emotion is all that is left.....The seller will not be able to argue from a logic or numbers basis. Being that prepared makes the competition look like slackers and helps you get an appropriate listing price. Most folk's real estate market knowledge is 2 years old in our area...they still think it is bad...it is not...good stuff is flying off the shelf.
Debe - This is an excellent explanation of "absorption rate," I've been thinking about adding this type of information to my market reports.
I see this has already been reblogged several times, and I see no reason why I shouldn't add to the total!
Thanks everyone, for the kind words and the re-blogs! I do agree, obviously, that this is a far better explanation of how the market is faring, compared to our tired CMAs! I challenge you to give it a try--I promise it works!