A Guide To The WGRE Absorption Rate

Seeing as though my prior guide to the Absorption Rate disappeared with my old web host's server, I thought it would helpful to re-post this Guide To The Absorption Rate.

The Absorption Rate is a weekly feature that is posted every Tuesday. I will be presenting the Absorption Rate (AR) for the Joliet, Shorewood, Minooka, Channahon, Coal City, & Morris real estate markets, plus a total for those 6 communities. I guess now would be a good time to explain Absorption Rates and how I am figuring them.

Absorption Rate (AR): The number of months that it would take to sell an area's inventory of homes at the current sales/contract pace. Often expressed as "months of inventory".

How I Will Be Calculating Absorption Rates (AR). (If you're someone who only cares that the light goes on when you flip the switch, please feel free to skip this next part. If you are more along the lines of Thomas Edison then read on)

• As this is a weekly report, I will be using a running 30 day calendar. For example, as oppossed to knowing the AR for the month of April 2008, I will be figuring the AR for the last 30 days. This should allow us to pick up on trends faster.
• I will be using Homes Under Contract as oppossed to Homes Sold/Closed. Both methods are used and accepted by real estate professionals. The advantage of using Homes Under Contract is that it is current indicator. Homes Sold/Closed is a laggard indicator, as those homes reflect homes that went to contract 45 to 90 days prior. The disadvantage of Homes Under Contract is that homes often "fall out of contract" (think House Sale & House Close contingencies) and go back into the available listings. That considered, I think that it is more useful to determine what the buying public intends to do even if circumstances prevent them from doing so.
• I will be combining Attached & Detached Homes into one comprehensive category.
• In Homes Under Contract, I will be using homes that went both Contingent and Pending in the MLS. You Edison types might not like this, but us Realtors® confuse the two enough that I would be doing more of a disservice by using just one or the other.

Ok, you "switch flippers" can join us again. Here's a quick example:

If 10 homes went under contract in the last 30 days and there are 120 active listings, then the AR is 12 months of inventory. All things being equal (and they're not in the real world), a home owner can expect to have his home be listed for sale for 12 months before they get a contract.

Using The Absorption Rate

The key figure in the Absorption Rate is the Monthly Inventory (Mon Inv). That is, with everything else being equal, how many months it should take to sell all the homes currently listed for sale. A prospective Seller should be able to guage how long they might expect their home to be on the market. To guage Monthly Inventory, consider these 3 suggestions:

1. Use Both Community & Total Monthly Inventory: The sample sizes for some of these communities can be very small (Coal City, 107 listings), so I recommend looking at both the Community & the Total Monthly Inventory for a read on the marketplace.
2. Use Change From Last Week (Last Wk) & Last Month (Last Mn): The goal of these 2 columns is to pick up trends in the marketplace. Change From Last Week, the change from the last report, is more susceptuible to jumping around so I would view that in combination with the Change From Last Month, the change from the report 4 weeks ago. Both leaning in a specific direction is a better indicator of stronger trend.
3. Summary: The Summary is as it suggests a summation of whether the current market is a Buyer's Market (more than 3.5 Months Supply), a Neutral Market (2.5 to 3.5 Months Supply), or a Seller's Market (less than 2.5 Months Supply).

I'll compute this every Tuesday and post the same day. If you have any questions about this report, please feel free to contact me, Tim Soper of RE/MAX Pinnacle, at (815) 715-2720.