The calculation of real estate absorption rate (monthly inventory) is widespread and yet at times controversial. …Why? …Because one part of the (simple) formula requires a subjective input! That is; what will be the unit sales rate for a given market or market segment over the next few months?
Various practitioners will take the current month’s sales rate and just project it to the next month (ignoring seasonality), others may use a rolling average of the prior 12 months (ignoring current market dynamics), some may use a proprietary seasonal formula to project the near-term sales rate input, and yet many may simply decide to avoid the calculation altogether assuming it meaningless within the context of an initial offer or listing price.
Our experience as been in line with many other real estate professionals, in that we find the residential real estate business is dramatically effected by location, amenities, and price range Thus we find an absorption rate calculation most beneficial within two important phases of the home buying process. First to segregate the overall market into various locations and price ranges to get a feel for any current market bias that may exist prior to actually viewing individual homes and secondly to refine this calculation to individual neighborhoods along with Comparative Market Analysis (CMA) techniques prior to any offer or contract negotiation.
For the sellers of residential properties, an absorption rate calculation prior to settling on an initial listing price and when considering adjusting the listing price would seem to be very much in order, if only in setting time-on-market expectations.
As always it must be acknowledged that explicit location, amenities, and the current condition of a home can vary widely and effect the market value of an individual home thus it is always important to work closely with your REALTOR® after narrowing your home search to a short list.
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