Kenmore Undressed

Why Understanding Absorption Rates is Important

Absorption Rates = The Market’s Blood Pressure

Let’s say you want to become a “player” in the real estate market. You intend to purchase or sell a house/condo in the near future. Hey, this is an important decision and you want to educate yourself and become a knowledgeable consumer. What do you do?

It’s likely that you’ll do what everyone does: You go to the internet and look at all sorts of property search websites to see what’s out there. You talk with a number of real estate agents. You listen to the news. You talk with Uncle Bob who claims he knows EVERYTHING about real estate. You grow increasingly nervous. The more you research, the more nervous you become. You realize there’s way too much information out there. It’s like going to the doctor: it’s such a hassle, sitting in the waiting room, being stroked and poked.  “Gosh Doc, isn’t there just one test that gives you a general picture of my health?

In fact, the doctor metaphor is quite useful in understanding how to judge the overall health of a particular real estate market: The first thing a doctor does is take your weight and then he/she TAKES YOUR BLOOD PRESSURE. It’s of paramount importance. It’s a “leading health indicator” so to speak.

Of course there is no perfect diagnostic approach that tells us everything about a particular market; however, you can gain great insight into a market by analyzing  the “absorption rates.” In a very real sense, knowing how much inventory exists in a market, and knowing how much of that market gets “absorbed” in a given period of time indicates if the market is moving or not, a seller’s market or not, a good time to buy or not. Let’s take a look at some absorption rate charts to illustrate my point:

Puget Sound Absorption Rate – June 2009

These absorption rate charts tell us a lot about the real estate market. In the charts above we are looking at the whole Puget Sound Region:

1. They show us how much inventory is out there. They show if inventory is rising or falling.
2. They show us how many properties are pending a sale (one can use sold properties as well)
3. They they show us what percentage of the inventory is in play
4. If you’re a buyer, you can see what pressure is being exerted on the sellers
5. If you’re a seller, you can get a sense of how likely it is you will sell your home in a given month

If you look at the information above, it’s clear that inventory has dropped from the previous two years and more inventory is being absorbed (last year the absorption rate was hovering around 11%-12% versus this year which is more like 17%). This means that if you’re a buyer, your choices of homes has dropped a bit, but that sellers only have a 17% chance of selling their home (given the competition).

King County Absorption Rate – June 2009

Not surprisingly, King Co. is a more active market due to it’s population and proximity to the urban economic centers of Seattle, Bellevue and other larger towns.

Snohomish Co. Absorption Rate – June 2009

Although the inventory is much smaller in Snohomish Co. versus King Co., the absorption rate is similar. In both instances sellers have a 20%-23% chance to sell a home.

If/when you finally enter the world of real estate, it’s important that you understand the absorption rates in your target area. As you can see from the graphs above, overall, Puget Sound has been experiencing a fairly lethargic market since 2006. Certainly, it’s good that we’ve seen the rates rise this last several months; however, June and July are the most active months historically. It will be interesting to see what happens on the back end of 2009.

All charts courtesy of http://alanpope.com/

Share