One of the terms frequently used is absorption rate. But what is it exactly? And how can knowing it help you prepare?
The absorption rate is a measure that shows us how quickly Real Estate inventory moves. Calculating it gives us 2 important factors:
1. How long would it take to sell the current active inventory if market conditions remain stable and no new homes were to come on the market? Of course the latter is not realistic but the number of months is another indication of whether we are in a buyers', sellers' or balanced market.
2. Calculating the absorption rate for different time periods (previous 3, 6 and 12 months for example) gives us an idea if the market is stable, slowing or moving faster. This is a calculation required by all appraisers by the way and the information has to be included in the appraisal. A slowing market could result in a negative value adjustment.
How do we calculate the absorption rate? Let's take the Silver Spring, MD market as an example:
Number of homes active (as of 7/11/2014): 643
Number of homes sold over the last 12 months: 2666
Average per month: 222
Absorption rate: 2.91
Assuming that market conditions remain the same it would take less than 3 months to sell the current inventory.
What does that indicate? An absorption rate of 5 - 6 months is considered balanced, anything below that a sellers' market (appreciating values) and above a buyers' market (depreciating values).
The absorption rate for Silver Spring, MD Real Estate is 2.96 months when we look at the last 6 months and 2.45 if we consider the previous 3 months. Seasonal fluctuations are to be expected.
Knowing the current absorption helps set realistic market expectations and can assist with time planning. However, a fast absorption rate does not mean that Silver Spring, MD home sellers do not have to prepare their home for the market. When sellers make one or more of the biggest seller mistakes, it can result in longer days on the market and a lower sales price - no matter the market conditions.
Silver Spring, MD Seller FAQ: What is the absorption rate and how can it help me?