Absorption Rate Calculation

[Juan Carlos]

Good day BP community!

We were trying to clarify how to calculate the absorption rate for a market and looking through the forum for some guidance and found this old post by Robert Autorino seven years ago that did not get answered. We  have been looking through the web as well and came across a couple of different formulas and wanted to verify with you all on how to go about it.

"Hi All,

I'm in the process of evaluating some areas that I tend to invest in, however I'm not too sure of what my #'s are showing me,for the fact that it seems there is a rate of home sales of 1.60 days, giving me an absorption rate of 40.0.

Can someone help check my numbers below and let me know if my calculations are correct or make sense please? Any help would be great!

THE DATA:

• 1. Time Frame = 243 days (total days from January 1, 2013 to Sept 1, 2013)
• 2. Number of Sold Homes = 152 (from January 1, 2013 to Sept 1, 2013)
• 3. Number of Active Homes = 25 (at the end of Sept 1, 2013)

MY CALCULATIONS:

• Rate of Home Sales = 1.60 – 1 home is sold every 1.6 days. This number is found by taking 243/152 (Time Frame/Number of Sold Homes)

• Absorption Rate = 40 Days??. Found by taking 25 x 1.60 (Number of Active Homes x Rate of Home Sales)"

Is he correct?

First formula we came across is:

Absorption Rate = # of sold/# of (days or months)

= 152/243 = 0.63 (sales/day)

Monthly Supply (Time it takes for a property to sell) = # of listing/Absorption Rate

=25/0.63 = 39.7 = 40 (days) <--- which matches his number

Second formulas we came across is:

Absorption Rate = # of sold/# total listing (sold & active)

= 152/(25+152) = 0.86 = 86% (sold in the period of time analyzed)

Monthly Supply (Time it takes for a property to sell) = # of listing/# of sold

=25/152 = 0.16 = 0.16*243 = 38.9 = 39 (days)

Which one of all is the correct way to analyze a market using Absorption Rate?

Thanks,

The Brothers