What does Aborption Rate mean? How will knowing the Absorption Rate help sell your home in the Iowa City area?
Real Estate Professionals throw around a lot of terms that don’t mean a lot to sellers. Absorption Rate is one of them. The Absorption Rate is a calculation that tells us how long it will take for the market to “absorb” or sell homes based on current market conditions. More specifically, to calculate the Absorption Rate, we look at the number of homes currently on the market and calculate the length of time it will take those homes to sell if homes continue to sell at the current rate. The resulting number is the Absorption Rate.
How does that help you as a seller? Well, the first thing it does is give you an idea about what’s happening on the market. It helps to set realistic expectations. Lots of times sellers put their homes on the market expecting to move in 2 to 4 months. If the absorption rate is 6+ months this could mean a longer wait. If you still want to move in 2 to 4 months you will need to price your home to sell to accommodate that. You increase the chance of your home selling in the Iowa City area based on how you position it on the market. If your listing price is higher than other homes on the market it will take longer to sell. If your listing price it lower than the competition it will sell faster. That’s exactly why knowing the Absorption Rate is a really helpful tool for you.
How to Calculate the Absorption Rate
Here’s how the absorption rate is calculated: The first step is to determine the number of homes sold in the past 12 months and how many are currently on the market. The next step is to divide the number of homes sold by the number of active listings to establish just how long the turnover rate is for homes. In other words, how long it takes the market to “absorb” homes.
This example is based on a broad overview of the Iowa City real estate market and the one I use in my market reports. It includes all residential properties in Iowa City and all price ranges.
908 homes sold in the last year in Iowa City and there are currently 348 showing as active listings.*
908/348 = 2.6 yearly inventory turnover – (The inventory of homes turned over 2.6 times in the last 12 months).
12 months is divided by 2.6 to come up with the absorption rate.
12/2.6 = 4.6 months = 139 days – The absorption rate for homes in Iowa City is 4.6 months or 139 days on market.
That gives you a general idea of the Iowa City real estate market. What it doesn’t factor in is a specific neighborhood or price range. Condos for instance sell at a different rate than single family homes. Homes priced at $150,000 sell at a different rate than homes priced at $200,000. We need to get a lot more specific when we look at your home. I’m going to move out of Iowa City for this example and hop over to North Liberty and calculate the Absorption Rate for Single Family Homes in the $220,000 – $240,000 price range.
29 homes sold in the $220,000 – $240,000 price range in North Liberty IA in the last year. There are currently 7 single family homes in this price range on the market.*
29/7 = 4.1 yearly inventory turnover – (The inventory of homes turned over 4.1 times in the last 12 months)
12 months is divided by 4.1 to come up with the absorption rate.
12/4.1 = 2.9 months = 88 days – The absorption rate for single family homes in North Liberty IA in the $220,000 – $240,000 price range is 2.9 months or 88 days on market
This post illustrates how useful the Absorption Rate is when it comes to listing your home in the Iowa City area. Together with a current market analysis it’s an effective tool to help you figure out how best to position your house on the market when you list it for sale in the Iowa City area.
*Data for this report was pulled from the Iowa City Area MLS September 22, 2012.