This is an awesome post !!  Thank you for sharing !!  I am book marking this one.

Good details't get it, but, I don't get it.  I know when there is lots of inventory and agents sellers are distressed due to lack of sales.

I know as an investors, sellers are lots more motivated to listen to my off the wall creative concepts of making offers on thier properties.

Still great post.

 Charles

Excellent post Rich. mind if I use it in my class?? I love how you explain it.

Monika --  go right ahead.  Permission granted.  The only thing that I ask is that you use it in it's entirety, and include a link back to this post as the source.  I edited the post to incude that information, to make it easy for you to cut/paste/print at your discretion.

Great work Rich.  Thank you for expressing this so clearly.  May I also have your permission to use it in my classes?

Charles -- I think the next article will clarify some of this for you, and what you are pointing to is right on the money -- there is a strong correlation to Absorption Rate and "flexibility" of price negotiations with sellers.  I will detail that in the next article.

Marlene -- as you can see from the phrase I added in the post:  I have included a general reprint permission for the post itself.

I am flattered that instructors would deign to use my article in their classes.  I am pleased to be able to contribute to the betterment of our profession.

Hi, Rich:  Thanks!  I understand the concept and have been doing absorption rate in the last few weeks, but you explained it in a way that I can discuss it much better to another person.  Thank you for the permission to print as well.

Rich,

I will happily use this info (in it's entirety).  Good information.

Thanks,

Fran

Very good work. The one thing I would change is figuring out the average number of homes sold. In many places closings swing up and down with busy months and quiet months. I take the average number of sales across the last six months.

Also to an extent this months closings are "sales" from a month or two back, so averaging it out over a few months kinda makes sense.

 The point to look at price stratas is very important though. Well put indeed.

Athol Kay -- I would not recommend using an average for the sales numbers.  The statistic would lose some of it's meaning.  It is intended to give you a "snap shot" of current conditions.  A rolling average could give a false sense of stability in a dynamic market.  Your value to a client is in your ability to read the conditions as they are, so you can advise them accurately.  By averaging them, you might miss the signs of an impending crash or boom condition, until it is too late.  Remember, you want to "hit the market not chase it."  Using a rolling average by definition would require "chasing the market." 

Here's another teaser:  The next installment in this series will show you the value of the Market Absorption Rate with regard to pricing your clients' listings, and negotiating your clients' offers.  "Hitting the market vs Chasing the Market" could translate to many fewer days on the market.  Stay Tuned!

Wow, what a great presentation of absorption. Bookmarked. How did I miss this originally.

But, breaking it down to all those micro levels. Do you do that on a regiular basis?

so basically, this paragraph

"ABSORPTION RATE is the mathematical representation of the relationship between supply and demand.  The total amount of available product is divided by the total amount of product sold in the previous month.  The resulting number represents the number of months it would take, at that same pace, to sell the entire inventory of product."

says it all pretty much.

Keith -- the "Micro" breakdown gets done at least monthly in my primary market area.  I will do addiditional analyses in any area that I have clients looking to buy in, or selling in.  It may seem like a lot of research, but the payoff is well worth it.  You will know your market better than you ever have before, and your expertise will shine for your clients.

Rich,

Excellent post and explanation. We are somewhere around 30 months on the absorption rate.

Ron -- run the absorption rates in each price range, and you may be surprised to see much better absorption rates in different ranges.  If properties 300 to 500 have a rate of 6.3 and 501-750 have a rate of 20.9, that is strong evidence that a listing at $515,000 will likely sell much faster if reduced to $495,000, but a reduction to $505,000 wouldn't likely expose it to any more buyers than before.  Pricing to "hit the market" rather than chase it is key, and understanding Absorption Rate is a big factor.

Hi Rich, thanks so much for a great explanation of absorption rate and I like your comment about hitting the market instead of chasing it.  Keep up the great work!

Thanks, Vickie.  I will have another Article on that very topic coming soon.  Keep watching the Blogosphere!

Really good post.  I think that many agents should learn it completely and use it in their own practices.

Thanks, Steven.  In my estimation, Absorption Rate is the grand-daddy of all statistics.  That very basic relationship between supply and demand.  So much of what happens in this business is essentially driven by that one key relationship.

Very interesting stuff, not sure why this wasn't featured?  None the less, very good post and a great contribution to us all!  Geez, and I thought being a successful Realtor was a walk in the park:-)

Great post thanks for the info

Thanks Jason. -- A walk in the park?  Perhaps if I were marketing a home that bordered the park, or perhaps if I were marketing the park itself, then being successful might include a "walk in the park" -- but I don't think it could ever be one.

Margaret -- thank you for stopping by to read it, and I hope the information helps you.

Great articel - I just finished a very similiar excercise.  I wrote 5 different Market Snapshots for the 5 zip codes in my market.  If you are interested, you can check one of them out here  Market Snapshot - San Jacinto CA 92583 | June 30, 2007 .

I think I have everything that you referred to in my report.

John, thanks.  I will certainly check out your Market Snapshot.

Rich, Thank you for an excellent article on absorption rate.  This is something I have used for quite awhile, but I am amazed at the number of agents who feel it is "too time consuming".  But hey, that's an advantage for me that they do!  I'm looking forward to more posts like this from you

Thank you very much Rich for educating me on this particular topic.

Lanre:  You are most welcome. 

Gina: By taking the extra time this analysis takes, you really do get a better understanding of your market, and thereby become of greater value to your clients.  If agents feel that becoming more valuable to clients is not worth their time, well...let me just say..."to each his own."

Good topic, how do you take into account fsbos selling.

Phil -- Great question.  Homes that are For Sale By Owner can affect the overall statistics, but only slightly.  Here's why I say that:  Statistically, a large percentage (some say 70% some say 80%) of unrepresented sellers eventually engage a REALTOR to market their home.  Some simply change their mind, and withdraw their home from the market.  Some are successful and sell their home on their own, of course.  Those transactions eventually will be recorded on the public record, and will appear in the statistics that are gathered through that method.

When you evaluate the market conditions for your client, you are drawing your data from the MLS.  You are reporting on the activity as measured by the tools at hand, and your analysis will be based on the facts reported.  There is no real need to adjust your analysis for the presence of FSBOs, because the Supply vs Demand formula that Absorption Rate represents is measured by Inventory and Previous sales of that inventory. 

An analogy that might clarify this for some people:  School Performance.  Schools are rated by their student's abilities to pass certain tests.  Adjustments are not made to the statistics based on the testing of home-schooled children that might have otherwise attended that school.  You need to think of unrepresented sellers (FSBOs) in much the the same way.

I hope that answers your question.

I agree about the FSBO's. We can calculate the number of sales but we would have no idea about how many were "listed". I am in the process of trying to calculate new home sales into absorption rates. Give me your thoughts on how I might do this and not have "garbage in garbage out" for my resulting market analysis.

Chip --

New Construction is a bit easier to address when doing absorption rate analysis than FSBOs, certainly.  Most MLS systems will allow you select whether or not to include new construction in your searches.  I suggest that for the most complete analysis, you look at the "big picture" and include new construction in your overall analysis. I say this for a couple of reasons:

1. Your buyers will likely look at new homes as well as resales.  For many buyers, if it is in their price range, new construction is preferred over resales.  As you advise your buyers, most will need to receive advice that covers the complete market.
2. Your sellers will be selling their home in a market that has new construction as well as resales.  Therefore, they need advice on how to position their home to compete in the total market, not just the resale market.

What I suggest is that after doing your analysis of a particular area's market, if your clients are specifically interested in purchasing new construction, then you then break out the new construction-specific absorption data.  It could arm you to negotiate the best price for them when they actually make an offer to purchase.  It will certainly help you and your client (and perhaps the builder you are negotiating with) understand the supply vs. demand side of the equation.

Because most buyers, (and all sellers) are searching or (competing) in the total market, your best bet is to analyze the market as it is, without adjustments.  In my experience, the practice of "adjusting" analyses to compensate for FSBOs or new construction is too often used to simply paint a brighter picture.  Your clients will be best served by accurate, thorough advice that is based solidly on the facts -- the complete set of facts.

Thanks Rich for the intilectuall stimulation. The problem I am having is that our assessors office records new home sales on taxstar. Which has very few searching and sorting cababilities as MLS does. New home sales are almost never sold on MLS and right now I have to go into every listing on taxstar to see who the original owner was to see if it is a builders sale. This is very tedious and I have very little hair left. 

Chip -- I feel your pain.  Just don't spend too much of your efforts with that type of breakdown.  The results might be interesting to you, but unless you can directly apply the analysis to your client, don't waste your time.  That is to say, knowing how fast new construction will sell out is only trivia to most buyers.  Unless you are doing an analysis on behalf of a builder, there will be little direct value to you. 

My advice:  Focus on the market knowledge that will actually make a difference to you and your clients.

Rich,

This is a great post. Thanks for sharing.

Rich:  This is one of the best and most helpful posts I've discovered on AR.  I cannot wait to use your information to make informative and accurate calcualtions in my maket.  I'm just getting started trying to do this stuff so I feel so lucky to have discovered your blog.  A comment above said they were surprised this blog was not featured and so am I.  Actually, I'm floored!!!  Thank you for this great information.

Great article and so true about getting down to the specific price range so you can see the differences.  I like to look broad to specific so we can see if the trending is following along.  And I find it enormously helpful to buyers who are unrealistic about stealing a house to see that not everything is a distress sale.

Keisha -- Thanks for the supportive comment.

Donna -- I tend to judge an article not by whether or not it was featured, but by how long it continues to attract comments.  As you can see, this was posted in April, and is still getting commented on in late November.  To me, that is a greater measure of the topic's worth than the intitial wave of comments that a "feature" would have attracted.

Rich, an excellent discussion on absorption rate and educating the public on this topic to properly price a property. I like to use graphs with it as well. Knowing there are different rates by price range is key too.

Rich, I have seen absorption rate calculated as the number of homes sold divided by the total number available for sale.  So a 4-month inventory would be the same as a 25% absorption rate.  In general real estate terminology, is it typical for "absorption rate" to refer to both methods of calculation?

Great post, I have to use this material. Thanks

This is a great post Rich, thanks for sharing.  I started my blog a while back and am looking at ways to incorporate market stats, including absorption rates, into it.  Being more specific as to the areas and price ranges seems to be the key to using the absorption rates accurately.  Thanks again.

Gary -- Graphs work extremely well when doing face-to-face presentations, but I have found that the best graphs in the world are useless when trying to describe something over the phone.  I get consumers calling me with questions quite often, and I need to be able to explain things to them verbally so they can understand it.  Around the holidays, at parties, I would often be asked real estate questions, as well.  Could you imagine the response if I set down my plate of quiche, and whipped out a series of graphs and charts?  I think there is definitely a place for them, but understanding the concept is more important than relying on a graphic representation, in my estimation.

Sallie -- you raise a good question.  And I admit that I had to wrap my brain around it for a bit before I could give you a valuable answer...

You suggest a ratio of demand divded by supply, as opposed to supply divided by demand.

Both methods essentially measure the relationship between supply and demand. 

Which then is the better method to use?

I think that the method I presented in the original post will be more useful to you, and more importantly, have a greater impact for your clients.  Showing a seller that there is a 10 month supply of similar properties in the price range he wants to get for his home that he needs to sell in 2 months will go a long way to helping him see the value of pricing it where it will get potential buyers' attention quickly.

It may be an issue of semantics, mixed with a bit of psychology, but I just think that seeing the statistic expressed as a number of months is easier to understand for most people -- at least for those of us without an MBA.  Some clients may be better suited to evaluating the rate as a percentage, however, so you need to make that decision on a case by case basis, I think.

Tyler -  Thanks for including a link to this article in your blog.

Excellent, excellent info, Rich.  I have bookmarked this for future reference.

Karen 

Thanks for the post. Valuable information to know right now.  I have several listings that are approaching 9 months to a year.  Your absorption rate info has given me and my clients valuable information as to what's going on. Thanks again. This is a great blog to bookmark and refer back to now and again.

Great info which reinforced a class I was in today.  I look forward to seeing more from you.

Karen -- come back as often as you need to!

Steve -- You can also use the absorption rate data to help determine what might make a stale listing sell faster. For example:  I have a listing that is a 3 bedroom, 1 bath town home.  The absorption rate when I took the listing was 6.  Now it is closer to 16.  However, the absorption rate for 3 bedroom, 1.5 baths has remained around a 6.  This means that the buyers value that powder room very highly.  By looking at the data carefully, I can best advice my client.  They need to take the property off the market, add a powder room, and then re-list it in order to attract today's buyers.  They will be able to recoup some of the remodeling costs when they finally sell.

Latonia -- glad to hear it.  I am curious, was this article mentioned in the class, or did you find it on your own?

Great presentation on this subject.

I use these statisticcs with both buyers and sellers.

Se my post at: http://activerain.com/blogs/jpeters

Joe -- Thanks, I will check out the post

This is an incredible post. I will be sharing this with everyone on my team!!!   Thank you.

This is a very nice post. I had to re-read it again. You really broke it down. This post should've definitely been featured. Great job Rich.

Bravo, Rich. This is exactly the sort of post I look for here at AR: informative, intelligent and timely. I've been grappling with the best way to present stats and have been wondering this very thing.  Thanks.

Stephanie -- Thank you.  Invite your team to check out the "Technology Toolkit Training" group, also, as I am posting many other helpful tips there, as well.

Lanre -- Thanks for re-reading.  This post certainly has had a long conversation time.  It has been over a year and the comments keep comming.  I guess that is because of the timeless nature of the post.

Lisa -- I can't really take credit for the "timeliness" of the post.  It was originally posted over a year ago.  But that points to the nature of blogs, and what makes them so effective in reaching consumers.  If you write about a topic, and post it online, your article can be seen whenever the consumer does their search.  Anyway, I am glad you liked it, and I appreciate your kind comment. 

Since I had several requests to "reprint" this article, I have also activated the "reblog" feature...feel free to use it to post it on your ActiveRain outside blog, if you wish.

Thanks for sharing the information in this article....makes some great points.

Rich, I just ran across this post and it is great!!  It is exactly the information I needed.  Thank you so much.

I can not express how valuable I find this post. I really appreciate your taking the time for this post, and thank you! It was so helpful and understandable!

Allen -- I am glad you liked it.

Ray --  If you think it will be helpful to share with your clients, feel free to use the "re-blog" feature to add it to your blog.

Molly -- Once you understand a concept, it is important to share that understanding.  If you share what you know, you may find your understanding of it grows as well.