Question: How Fast (or Slow) is the Housing Market?
“Absorption rate”: the rate at which available homes are sold in a specific real estate market during a given time period. It is calculated by dividing the average number of sales per month by the total number of available homes.
–Investopedia.com
Assuming the standard definition of “absorption rate” (above) is just a little too, umm . . . abstract for most people, here’s a more concrete explanation, courtesy of ace CRS instructor Jackie Leavenworth (I attended her course recently).
Imagine you’re at the grocery store, just finished shopping, and are in a hurry.
Which of the multiple checkout lines do you choose? (note: if you always seem to pick the slowest one . . . pay attention).
To make a good decision, you need to assess three variables: 1) how long is each line?; 2) how full are the shoppers’ carts in each line?; and 3) which checkout clerk is fastest?
Simple, right?
Housing Market Conversion Table; 3 Variables
Now, just convert into housing terms.
So, shopping carts = “For Sale” homes.
The number of items in each cart is the price of each home (more items = more expensive).
The checkout clerk (and specifically, their speed) is the number of Buyers.
Voila!
You’ve now got a framework for deciding which line is fastest.
Significance
Why does any of that matter? (to home Buyers, Sellers, and Realtors, not grocery shoppers 🙂 ).
Because Buyers need to know how fast the housing market is moving to be able to successfully compete for the home they want.
Sellers need to know to position their home to sell quickly.
And Realtors need to know to be able to intelligently advise their clients about such things are suggested list price and expected market time (Sellers); and expected search timetable and how much to offer (Buyers).
P.S.: Note that Realtors typically calculate absorption rates not just for an overall housing market (“the Twin Cities”), but specific price points (“under $200k”; “$350k – $450k”; “$600k – $750k,” etc.).
