lake norman real estate

What is an Absorption Rate and Why is it Important?

Real Estate QuestionsIf you are regular readers of this Lake Norman Real Estate blog you will know that I calculate the months of supply or absorption rates quite frequently.  But, what is an absorption rate and why is it meaningful when looking at any real estate market?

I just “Googled” Absorption rate and wow was I surprised. The top results all had different definitions and math calculations for what I thought was a very simple concept.  No wonder home buyers and sellers get confused!  So here is the definition for Absorption Rate from investopedia.com which best matches my understanding and use:

The rate at which available homes are sold in a specific real estate market during a given time period. It is calculated by dividing the total number of available homes by the average number of sales per month. The figure shows how many months it will take to exhaust the supply of homes on the market.

So, this number helps us determine if our Lake Norman housing market is “balanced”, a “buyers’ market” or a “sellers’ market” which is very important information to have when you are pricing a listing or making an offer on a home. Here is the second amusing part of this discussion. I “Googled” what is a balanced housing market and found myriad discussions and opinions with a variety of number of months!  I have always used 6-8 months and the consensus seems to be that 6 months of supply of homes for sale is a balanced market.  Again, you calculate the months of supply but dividing the number of active listings by the number of sales in one month.

Let’s take a look at Lake Norman’s absorption rate or months of supply for the past two years:

Lake Norman’s Month’s of Supply 2014 vs 2013

As you can see, for most part Lake Norman is still in a buyers’ market, especially in the slower months of the year.  But, look at our 2014 numbers compared to 2013.  We started 2014 with fairly high months of supply but we became balanced by May and have flirted with a seller’s market through the end of the year.

Finally, here is my 4th quarter analysis by price range which is an even better tool because it allows you to determine, using the months of supply column on the right, whether your specific price range is in a balanced, in a buyers’ or sellers’ market and plan accordingly.

Lake Norman’s 4th Quarter 2014 Home Sales by Price Range

Lake Norman Home Sales Price Range Chart

Clearly some price ranges are balanced, some are in a buyers’ market and some are seriously in a sellers’ market. Just as a reminder, all data I use is from the Charlotte Regional Multiple Listing Service.  I hope this helps!

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