Plano Realtors - Talk to Your Sellers About Absorption Rates

 

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 and 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 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.