2 real estate equations that cause the most confusion?

Easy:  Cap Rate and Absorption Rate.

Absorption rate is the topic for this post.

In this kind of market you REALLY have to pay attention to absorption rates if you are a seller or an investor.

Simply put -  the Absorption Rate is the rate at which inventory is being removed from the market by a closed, successful sale.  It tells me, if I am a seller, how long – all things being equal – i will have to wait to see my house “cleared” from the market.

Great definition?  Well, in reality the market is moving.  And in reality no home is average.   And in the real world, each and every house is unique.  So much for the technical definition.   In reality it’s a gauge.  Like a wind speed gauge.   Or a weather vane.

The absorption rate can show you what is happening and where the market is heading.  So it’s pretty useful.

In Perrysburg – with single family residential homes – we had 313 active listings on the market on the last day of October.  The number of sold listings last month was 18.  Multiply solds (18) by (12) months and you get 216.  This is a yearly number of solds IF everything works like it did in October.  Take this number (216) and divide it by 52 weeks in year and you get 4.15 homes per week being “absorbed” under current market conditions.

Now go back to the number of active listings in Perrysburg – 313 and divide it by 4.15 and you get 75 weeks.

Which is a huge absorption rate!  Usually we put that in month  -  so divide it by 4 and you get 18.75 months which I will round up to 19 months supply of inventory.  Which means if everything stayed the same and NO NEW HOUSES came on the market it will take 19 months to clear the market of inventory.

I use this number – as expressed on the chart below – to show my clients what is happening with the trends in Perrysburg real estate.

Today?  The absorption rate is going UP.

Got a question?  Ask!  jon@modene.com or 419-874-1188.