What Is Absorption?

Want to impress your clients and stand out in a sea of average agents? Who doesn’t?! What if I told you that you could learn a simple calculation that would set you apart from 95% of the other real estate agents? Sound too good to be true? It’s not. Here’s a little tool I train real estate agents with as a part of my Ultimate Listing Presentation seminar. But it’s not just for listing agents. Knowing your market cold is the first step to becoming an authority — the guy everyone goes to when they have a complex question about real estate — and without this tool you probably don’t know your market as well as you think you ado.

Allow me to introduce you to Absorption Rate. Before your mind wanders off into numbness, let me also tell you that this is one of the most practical metrics or measurements you can learn for your market or for subsets of your market. And better yet, it will only take you a few minutes to learn it. Although the manufacturing segment of the economy has been using this metric for decades, real estate, for the most part still doesn’t.

OK, so what is Absorption Rate? Simply put, it is the rate at which a market absorbs or eliminates inventory. Markets are always changing: new inventory is being added and old inventory is being sold or absorbed. Absorption rate helps you to take that fluid, ever-changing market and bring it into a measurable snapshot that you can use to advise your clients.

When I was still in college I took a class on managerial calculus (I know… YICK!) and one of the only things I remember from the class was a small section on inventory modeling. It seems that one of the practical uses for higher mathematics was to allow industry to determine the precise level of inventory to stock. Stock too much, and the company tied up cash or debt in sitting inventory and carrying costs. Too little, and the company would lose sales by not having the products on hand.

Now let’s take the logical step and apply it to real estate. Have you ever wondered why the average Days on Market (DOM) number from your local MLS never feels right? Why the MLS always seems to paint a rosier picture than reality? That’s because it’s not right! Sometimes it’s off by a little; other times it’s off by a mile. But it’s never accurate.

Before writing this article, I thought I would pull the latest DOM figures from my local MLS and compare that statistic with the actual calculated DOM. The latest number as reported in my MLS is 77 days. However, when I calculated DOM using the absorption method, the actual average DOM is 240! And believe me, your MLS is off as well — maybe not by as much as mine, but it is typically off by more than 50%.

So why the huge disparity? Because the MLS calculates the average DOM as the average days on market for the listings that actually sold. What it leaves out of its calculation altogether are homes that were withdrawn, listings that expired, listings that were withdrawn for a day and then re-listed to restart the clock, or those that were never put in the MLS until they sold (like new construction where they might list only one home in a subdivision, but actually have 20 for sale). And all of those affect the reported DOM. Not so when using the Absorption Rate method. You’ll know exactly how many days it takes inventory, on average, to turn over.

Or let’s suppose you had a builder as a listing client. Using absorption rates for various price points, you could wisely advise him on which price points to focus on in order to maximize his sales. Or suppose you were going on a listing appointment and you were able to advise your client of the number of month’s inventory of homes like his that are currently on the market. Would that information be valuable in winning the listing? Of course it would be!

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