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April 21, 2007

RE/MAX
Valley Real Estate

Contact:  Al Leonard
Phone: (330) 629 - 9200

Our Valley Homes - RE/MAX Times Online - Press Release

Use "Absorption Rate"
To Help Sell Your Home More Quickly

by Jack Pearce, Broker, REALTOR®, ABR, CSP, GRI. e-Pro

"My home's been on the market almost 9 months. Why hasn't it sold?"

All things being equal, the patent answer is, "Buyers simply won't pay your price. Lower it!"

Now, I said that's the standard answer - and the answer you'll get from most real estate agents. But, there is a better one. No, I'm not going to lay before you magical alternative to lowering your price, because the reality is that your buyers are buying other homes. Homes similar to yours, but for less money. Yes, you will have to lower your price in order to compete for the buyer's attention, but by how much?

The good news is that amount can be statistically derived, and may be less than you think if you apply the principles of a  little used, and less understood real estate tool called "Absorption Rate."

The Absorption Rate in Mahoning County (in Northeast Ohio) as I write, stands at 8.5 months (I'll show you how I arrived at that figure and what it means below). If your home has been on the market for longer than 8.5 months - you're home is seriously over-priced for it's location, or condition, or amenities, or all the above.

If the agent you hired is inexperienced at selling in a buyers market he or she will show you a long list of "sold" comparable homes and tell you this is your competition  - when in fact he or she should be looking at "active" comparables (homes similar to yours still on the market). Your competition in a buyers' market are other active sellers - not 'solds'. Solds have already won and have been out of the game three months, six months, or more.

Absorption Rate refers to the rate at which properties are able to be sold (or absorbed) in an area within a given period of time, usually one year. It tells astute REALTORS® the supply (inventory) of houses on the current market and how long it will take to sell all of those houses. The absorption rate is the ACTUAL Days On Market. The Days On Market stat that most agents recite only account for homes that sold! What about all the homes still on the market that didn't sell, or are pending, or were withdrawn? Absorption rate takes all of these into consideration, and the following rules of thumb may be applied:

  • Less Then Three Months - Bull Seller's Market
  • Three months - Moderate Seller's Market
  • Six months - Balanced Market
  • Nine months  - Moderate Buyer's Market
  • Twelve-plus - Bull Buyer's Market.

How do you figure absorption rate?

The math is straight forward, however, you will probably  need the help of a qualified REALTOR® to help you extract the Multiple Listing Service information you need to do the calculations.

For any given time period and area you need four pieces of information:

  1. The number of Active homes currently on the market
  2. The number of Contingent homes currently on the market
  3. The number of Pending homes currently on the market
  4. The number of homes that have Sold during the past 30 days..

Example: What is today's Absorption Rate for houses of all price ranges in Mahoning County? (Today being  April 21, 2007)

  1. Since we need at least one month's worth of data we'll search the MLS records for current 'Actives', 'Contingents', and 'Pendings.' Then we ask the computer to give us the number of 'Sold Houses', for the 30 day period - March 22, 2007 to April 21, 2007. Here's what we find:
    1. Actives = 2,229
    2. Contingents = 31
    3. Pending = 298
    4. Solds = 306
       
  2. We make the assumption  that at the current rate of 306 "solds" per month, in 12 months there would be:

    [12 months] x [306 solds / mo.] = [3,672 houses sold / yr.]1
     
  3. Now we need to calculate how many houses per day  must be purchased in order to sell all 3,672 houses in one year (365 days).

    [3,672 solds]÷ [365 days] = [10.06 houses / day]. (Keep this figure handy, we'll need it again in step five.)
     
  4. Add up all current unsold listings. (Since 'Contingents' and 'Pendings' have yet to close, they must still be considered 'unsold.') Therefore, 

    [2,229 'actives'] + [31 'contingents'] + [298 'pendings'] = [2,558 current unsold listings].
     
  5. Divide these current unsold listings by your [houses / day] answer in step three:

    [2,558 total unsold houses] ÷ [10.06 houses / day] = [254.27 days].

    We now know how many days it will take to sell 2,558 houses. Since we normally talk about Absorption Rate in terms of months -  lets convert days to months:

     [254.27 days] ÷ [30 days / mo.] =  [8.48 months].
     
  6. Conclusion:
    It will take 8.48 months to sell all 2,558 houses currently on the market in Mahoning County. This is called the Absorption Rate. (And, yes, we're approaching a bull 'buyers market.')

How can you use Absorption Rate to sell your house more Quickly?

We've learned that the  Absorption Rate is the ability of the real estate market to sell off all homes for sale within a given period. Using our example:

If 10 homes are sold every day, and there are 2,558 homes to sell, then it will take 8.5 months to sell all of those homes.

But Absorption Rate, by itself, is only an interesting number. To make it meaningful it must be armed with a well prepared Comparable Market Analysis (CMA). A good CMA done by a professional REALTOR® will compare very closely to the value set by a certified appraiser, and will set the price range in which your home should sell. Notice, I said price 'range.' The purpose of a CMA is not to find an absolute value - but to price your home to the market in a range that will generate interested buyers and ultimately an offer to purchase. Absorption Rate further defines where in that price range you should be in order to sell in a reasonable amount of time -  especially in a rapidly changing market.

Therefore, let's say that you need to sell in four months (app. ˝ the 8.5 month Absorption Rate calculated above.):

In our scenario, with 2,558 homes for sale, we know that 50% of them will sell in the next four months. To sell your home within four months, your asking price would have to be in the lower 50% of the price range as detailed in your CMA for similar "active" properties currently on the market.

In simpler words, the Absorption Rate in conjunction with the CMA adjusts the price of your home to the dynamics of the current market place. Pricing your home to the market at the start could save you many costly months of marketing time. In a declining market, you probably would have seen more profit on the sale of your home 3 months ago if it were priced right, than you will have to reduce it today.

As stated, determining the price of your home via sale prices of comparable "sold" homes will only give you half the dynamics of the market place. You have to find out where your price stands in terms of overall buyer demand. You have to know what your competition is doing, only then you can price your home with confidence.

Here's an example:

The house across the street with the exact same floor plan as yours sold last year for $150,000 and it didn't even have your updated kitchen and finished rec-room in the basement. Your agent says, "This is a no-brainer. Given your amenities you're house is worth at least $155,000 and we'll tack on another 5% for negotiation. Trust me. The offers will pour in."

What your agent failed to realize is that a year ago there where considerably fewer $150,000 homes in the market place. He didn't take into account the number of homes on the market today and how long it will take to sell them. An absorption rate analysis of the situation would have pointed out that asking as much as $162,000 was sentencing your home to languish on the market for many months, unseen and unsold.

If we were to apply Absorption Rate to the equation, we would use the CMA to find all the comparables of all recently sold homes similar to yours.  We would calculate an absorption rate for that range (it may be different than for all homes in the area.) Let's say it were calculated at 6 months. Within that range we would find the median price for all the homes that sold. If you price your home to sell here, your chances of selling within 3 months at your stated price will be at least 50% greater than for homes with a higher selling price.

Absorption Rate also points out the fallacy of coyly piling on another 5% - 10% to your asking price 'just for negotiation.' This tactic can work in a sellers' market, when houses are appreciating even as we are putting out the 'FOR SALE' sign - but it will backfire in a buyers' market. With hundreds of homes to choose from, buyers don't spend time and energy negotiating. They find the best house at the best price and buy it. If you're not priced where you should be, they won't even bother to look at your house. You'll simply be ignored.

If your real estate agent has been licensed less than 7 or 8 years, he or she only knows the ecstasy of a seller's market. A market in which the absorption rate has been a steady two to four months. A rate small enough to ignore, and low enough to make any agent with a pulse look good at what they do. It's easy to sell homes when buyers are falling all over themselves to , well - buy.  Today's market, however, demands that other factors, like Absorption Rate, be taken into consideration and skillfully applied.

 If you ask your agent, "What's the current Absorption Rate for my area and my price range?" - and all you get is a blank stare - it's time to find another agent.

 

[1. Note: If you have a head for numbers you may already have asked yourself why can't I just ask the computer to tell me how many homes have sold over the past 12 months, use that figure, and skip the computations in step two and all the conversions from days to months altogether. The answer is because you want to know what the market is telling you now, and not confuse the issue with what it was doing a year ago.

 In other words, homes may be selling at a far slower (or faster) clip, now, than they were 12, 10 or even 3 months ago. If we include sales rates from 3 to 12 months ago, our 'Absorption Rate' may be skewed to a lower (or higher) value than is presently the case. Therefore, it's important to take just a 30 day snapshot of the market so only the dynamics of today's market are included. The procedure above does just that.]

 

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RE/MAX Valley Real Estate
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