What are “absorption rates” as they pertain to real estate
sales? The absorption rate takes into
account how many homes are on the market and how long, on average, it will take
that home to sell on the open market.
Professional Plano Realtors and DFW Realtors have a
duty to their Seller clients to explain this calculation so they will have an
idea about how long it may take them to sell their home. Whether you are at the listing presentation,
or you're following up with a seller who's been listed a while, providing the
added service of helping the sellers to understand absorption rates and how
their price falls into the current pool of available homes for sale in their
area. Absorption rates are now required from appraisers for all government
related loans; which is just about every loan out there today.
Fannie Mae's Form 1004MC, and Freddie Mac's
Form 71 both require that appraisers calculate days on market, inventory
levels, and absorption rates for the comparables and immediate area around the
subject home. The assumption is that tracking the variability of these three
measures across time periods can provide trend information to determine home
value direction. The appraisers must also take into consideration the Plano foreclosures on the
market which could impact the absorption rate.
Absorption Rate Calculation Example- Say
we take the number of closed sales for the last six months in a certain area,
and it is 110. We then check the current number of active listings, and it is 420
in that area. First, divide the 100 sales by 6 months, to get a rate of 17
closings per month. Then, divide the 420 active listings by 20 to arrive at 21
months to move that inventory; that's the absorption rate.
Under the Freddie Mac's Form, we see that they
require this number for three time periods; the immediately preceding three
months, four to six months back, and seven to twelve months in the past. Then,
the appraiser must indicate whether the absorption rate is decreasing, stable,
or increasing. If it's decreasing, then the market appears to be slowing, and
this could cause the value of the home to be adjusted downward. Also considered
are corresponding periods for days on market, inventory, and the sale-to-list
price ratio. If sale prices are getting lower in relation to list prices, this
will be evident on these addendum forms, and the appraiser should be adjusting
the home value downward. So, it's clear that a good market is showing higher
absorption rates, lower inventories and shorter times on market on average.
They prefer to use "median" numbers.
On the
bad side, if median absorption rate is declining, and days on market and
inventory are rising, this doesn't look good for the market in the near term.
Couple that with wider spreads between list and sale prices, and the picture
darkens as well. But, good or bad news, you should be on top of this
information and sharing it with sellers and prospects to help them in their
decision processes.
