What is Absorption Rate Pricing?
Absorption rate pricing isn’t new but often an over-looked method used by real estate professionals to calculate the value of a home and the market conditions. The calculations are based upon the principles of supply and demand.
Only a certain number of homes will sell in any given period. For example, if 24 homes sold in the last 12 months that means the market absorbs 2 homes per month on average. So if there are 12 homes currently listed for sale there is a 6 month supply.
- A 6 month supply is considered a stable or balanced market.
- Less than a 6 month supply is considered a sellers market.
- More than a 6 month supply is considered a buyers market.
To calculate absorption rate Realtors and Appraisers will do the following:
- Search for homes that sold in the last 3, 6. and 12 month period that are similar to yours. Similar in location, condition, size, features, amenities, and price. From these numbers, the average sales per month will be calculated.
- They will then search for all active listings. Once again for homes similar to your home.
- The monthly supply of homes on the market will then be calculated producing the average number of home sales per month.
- This will give a rough estimate of how long it could take to sell your home.