What is absorption rate pricing? Here is a quick definition: Absorption rate pricing answers the question, “How many months will it take to sell all the homes in my area at the current rate?” If the answer is a high number, the seller better be ready to price their home aggressively and ahead of the competition, or plan on it sitting until other homes are bought up ahead of theirs.
To figure out the absorption rate of homes selling in your neighborhood, all you need is a simple equation. First, find out the total number of active listings (homes currently for sale) and the total number of homes that sold over a specific period of time, like six months. Then divide the total sales by six to arrive at the average number of sales per month. Finally, divide the total number of active listings by the average number of sales per month and viola, you get the absorption rate. This number tells how long it will take to sell the current inventory in your area. This equation cannot take into account any new homes that may come on the market and it assumes that all conditions are the same. It also cannot look to see if all the homes are truly equal in every way.
When I first got into real estate, everyone would supply a CMA or comparative market analysis. This was a good way to price home. I am going out on a limb here as suggesting this is no longer enough and certainly not adequate. I stopped doing CMAs a while ago because they just were not telling the real picture. Given the economy and real estate conditions, absorption rate pricing is a much better determiner of what a home should be priced at and how long it will take to sell. After all, isn’t that what everyone who is selling a home wants know…what price and how long. So next time you are thinking about selling your home and you are meeting with an agent, know enough not to accept just a comparative market analysis. Ask for absorption rate pricing and get your home sold faster.