Simply stated absorption rate is the rate properties are sold given a set of parameters such as area, zip code, price range, etc. Stated differently it is a measure of the number of months worth of homes currently on the market.
How is absorption rate calculated?
There are several different schools of thought and practice on how to calculate absorption rate. Some calculate using 1 month, 3 months, 6 months, or 12 months of data. The most common method I use is one month.
The calculation: The current number of homes available for sale is divided by the number of homes sold in the preceding month. The same set of parameters must be used for both sold data and homes currently listed.
For example: There are 453 homes currently listed for sale in a specified San Jose zip code. The number of closed sales in the most recent month of closed sales was 210. The current inventory of homes for sale is divided by last months closed sales (453/210). The result is 2.16.
It would take 2.16 months to sell all of the inventory of homes for sale IF the current inventory and the number of closed sales did not change.
It is important to keep in mind that the inventory is constantly changing as new listings are added and more homes are sold.
5-6 six months of inventory is generally considered a normal market. 1-4 months of inventory is considered a sellers market. 7 months and more of inventory is considered a buyers market. In the example given above, 2.16 indicates a sellers market.
Why Does Absorption Rate Matter to San Jose home Sellers and Buyers?
If you are a seller who needs to sell your San Jose home then understanding the absorption rate for your area and price range will help with pricing your home. Here’s another example. Homes in your area that are priced between $800,000 and $850,000 have an absorption rate of 7.5 months. If for any reason you needed a quick sale, you are relocating or are in contract to purchase another home, you would want to price more aggressively at or below the lower end of the price range. This would be in addition of course to your home being well prepared for market.
If you are a buyer searching San Jose home for sale understanding the absorption rate will help in determining the best offer price. If you are looking for a home in two different areas and one area has an absorption rate of 3 months and the other area an absorption rate of 7 months, then you may want to purchase the home in the area with a 7 month absorption rate because the seller may likely be more willing to negotiate on price.
Absorption Rates Are Market Indicators
The rates will vary based upon city, neighborhoods, price ranges, and other parameters used to calculate the rate. The absorption rate, combined with the actual physical location of the home, the condition of the home, recent renovations and upgrades completed, current market conditions, and other factors are used to determine a recommended list or offer price.
Is it time for you to sell your San Jose Home? Are you in the market to purchase a San Jose home?
If so, give me a call. I can be reached at 408.972.1822 or simply complete the form below and I will call you for a consultation.