May. 27, 2006 - Rate of Absorption of Properties on Market

A simple explanation using the above photo would be that the three arrows that made it through to the bottom of the red disk are the homes that have SOLD.  At the top of the red disc you see six trying to get through, they represent the homes on market.  If 3 of 6 sell, that is a 50% rate of absorption.  If three sold in a month, then the six on market would reperesent a two month supply.  3 remaining on market would be a one month supply.

Rate of absorption is a tool sellers and their agents use to determine price based on SUPPLY AND DEMAND.

It is best used on much larger quantities than the rudimentary example, as those three homes not sold may have had their own specific reasons why they did not sell.

If you apply the basic example on a broader scale, it is useful.  Let's say you are putting a condo on the market priced at $215,000 in 98034 today.  25 properties sold in the last six months in that price range in that zip code and 47 sold in 12 months.  I used $10,000 over and $10,000 under for price "range".  The figures pretty much prove out at 50 per year selling in that price range in that zip code.

There are ten in escrow today at that price range and only two for sale.  If 50 sell in a year, than 4 or so sell each month, and it being high season, 4 on average can be 8 in this month, as is proven by the number currently in escrow with 80% being 30 day escrows.

So the supply is low and the demand is high.  You may be able to push your price 5% above the last sale price, given these supply and demand calculations.  I say 5%, because in this price range you will likely have to deal with appraisal considerations.

If you are looking at buying or selling a house in 98033 for $1.1 million, the supply and demand considerations would be dramatically different.  Let's use "range" at $one million to $1.2 million if you are planning to go on market at $1.5 million.  Only TWO sold in the last six months, in fact only FIVE sold in the last year and Two are for sale.  So that is a six month supply! 

The data is less reliable in this price range, as many properties in this price level are built and sold without passing through the mls.  Some people move out of their old house temporarily, build a new house themselves on the lot, and then move back in to the new house that is now worth over a million dollars.  So more homes EXIST in this price range, than are SOLD in this price range.  Also, some people buy a house for $600,000 and have it torn down and a new house put on the lot before they move in.  That is why you see so many homes in this price range around town, more than appear to have sold using either the mls or the tax records.  But then, that's another subject altogether!

Suffice it to say that Rate of Absorption is a more useful too when applying prices UNDER a million than it is for property priced OVER a million.