December 30, 2009

The Absorption Rate of Homes and Pies!

Each week we pick up five or six pies made by our Layton Marie Calendar’s Restaurant to serve to our clients when they visit our office. So if you are ever hungry just stop by the office and ask for a piece of pie! It is our way of saying thanks to our valued customer base. The interesting thing about pies is the rate at which they sell is dependent on the time of year and the specific holiday. Shortly after Thanksgiving I asked our local manager, Diane, how many pies she sold over the three-day Thanksgiving weekend? I knew they were busy and I was thinking that they might have sold 500 pies or more! I cajoled Diane let me know her count and was shocked to learn that she lead the restaurant chain with 9,645 pies sold in that three day period! On a subsequent visit after the Christmas Holiday, Diane reported that they had sold over a 1,000 pies which was good for this particular holiday but nothing like Thanksgiving. I learned that selling pies, like selling real estate, is dependent on the time of year and the particular holiday. Thanksgiving is the holiday that leads the way as the best time to sell pies.

In real estate we also measure the rate of sales just like Diane did with her holiday pies. The rate of sales is called the “Absorption Rate” and before we give any of our sellers or buyers information on the best time to list a home or to buy a home we always look at the absorption rate for their particular neighborhood. The newly updated MLS system allows each of our agents to quickly calculate the rate of homes for sale in any area and also gives the rate of sale by the price range homes are listed.

In a balanced market the rate of sales ratio is between five and six months of inventory. A lower ratio number means that inventory is scarce and the market favors the Seller. When the number is above six then inventory is more plentiful and it becomes a Buyer’s market forcing Sellers to compete on price, home condition, and the payment of some or all of the closing costs. Knowing the absorption rate is critical information for any Buyer or Seller to know. The Absorption rate is also an indication of whether prices are appreciating or depreciating… and the rate of that change.

The actual absorption rate is calculated as follows according to the MLS definition:

Absorption Rate is the ratio of the number of listed properties (Actives) to the number of sold properties over a given length of time. Absorption Rate is an indication of Inventory or Supply.

Total No. of Current Actives X No. of months back
————————————————————————— = Absorption Rate
No. of U. C.’s + No. of Sold’s

In a closing today in South Ogden, the absorption rate for this price home was 11.68 for the past 30 day period. That means this area was a strong Buyer’s market. The Seller’s property was priced for the current market and sold before year end while three other properties in the area remain on the market with no offers. In this case the Seller paid closing costs and the property was maintained in good condition so that it stood out against other homes currently for sale. Just like pies move faster at Thanksgiving, homes in the summer months move faster as well. Add the additional incentive of the tax credit and home sales really increased up to the end of October. The Absorption rate for the summer was in the eight range versus an eleven range after Thanksgiving.

While a lot of people normally pull their homes off the market in the winter in Northern Utah, the tax credit may be just the incentive this winter season to keep the home on the market so that buyers will have more inventory to choose from.

If you would like more detail on appreciation rates for your area or the absorption rate for your neighborhood in order to make a decision to buy or sell, please contact our office.

Posted By: Steve Randall