Offer an Absorption Rate Report for Leads and Expert Status

9 Aug 2018

How do you generate leads on your real estate website?  Offering premium information and real estate reports is how many successful sites get that important contact information from site visitors.  The fact that this strategy works is why you see so many of these calls-to-action on real estate websites.  The diminishing returns from the strategy are due to the same stuff on every site:

  • sold property reports
  • days on market reports
  • new listings reports

You do want these offerings on your website, but if you want to differentiate yourself and your website, think about offering an Absorption Rate report with an explanation of how to interpret it.  From  “The absorption rate is 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 average number of sales per month by the total number of available homes.”  The resulting number is the number of months it would take to exhaust the current listing inventory at the current rate of sales.

Huh?  Think of it this way.  If 150 homes per month are currently being sold, and if there are 450 homes currently listed, then it would take 3 months (450/150) to sell them all.  Of course, new ones are coming on the market as well, so it’s not something that is going to happen.  You’re not going to stop taking listings and wait for 3 months to pass.

However, absorption rate can give hints as to market activity and possible home price trends.  An example should help.  If homes in the spring season historically have an absorption rate of 3 months in your market area, and if you run a report in the current spring season that shows an absorption rate of 2 months, what may this indicate?  First, homes are selling faster this spring than they have in the past seasonally.  It could be because they really are selling faster or it could be because there are fewer listings going into this spring season.  Either way, the supply-demand ratio in your market is not the same as it has been in this time period historically.

In our example, either due to fewer listings, faster sales, or a combination of both, we currently see only a 2 month supply of homes when we usually have 3 months of inventory entering this season.  What could this be signaling?  Higher prices are a good bet.  Lower inventory and/or higher demand usually brings higher prices.  If you’re taking a listing, you may want to adjust the listing price higher than the current comps are indicating.  The opposite situation, let’s say a 4.5-month absorption rate instead of the normal 3 months, means that either there is a glut of listings or lower buying pressure.  This often means lower prices on the way.  If you’re working with a buyer and this is the situation, you may want to advise a lower offer price on a home than you would normally suggest.  Now that we know the dynamics of absorption rate, how do we calculate and use it on the site?

Choose a Time Period 

This is a judgment call.  Appraisers are required to use absorption rate in their valuations to adjust for market activity.  Many of them use 12 months for their calculations.  You can do so as well, but you lose the seasonality factor in doing so.  Either 6 months or 3 months are better periods for getting a more seasonally adjusted absorption rate.  Using 6 months, here’s how you’d calculate the current absorption rate:

Divide the number of sales over the previous six months by the current number of listings
1187 sales / 6690 listed = .18 or 6690 listed / 1187 sales = 5.64 months of inventory

You can express it either way depending on how you want to use it.  You can even do this calculation monthly just to see how the market is moving in shorter time periods.  The problem with trying to look back historically is that unless you’ve been doing these for a while, you don’t have historical data.  The MLS can tell you how many homes were sold in a given period two years ago, but you can’t see the number of listings at that time in most cases.  So, you’ll need to start doing this and keeping your records for better comparisons as you go along.  The value to you is that your competition won’t have this historical data that you’re building.

Using the current example, let’s say that last year you were seeing inventories of 4 months of homes.  Now it’s 5.64, so either there are more listings, lower buying demand, or likely a combination.  This could mean softer prices in the next few months until the inventory comes back to more normal levels.

How Do You Report It? 

It’s a simple calculation using the data from the MLS, and you can do it with several time periods.  Let’s say that you’re doing it monthly, but using 3-month, 6-month, and 12-month periods, so you have three numbers.  You report all three and you add some context historically and your comments.  If you’ve been doing this a year or longer, you could then show the report from a year ago at this time and make comparisons.  You’re not predicting, but you can make some data-driven statements of what this may mean for home prices.

Build this simple report monthly or quarterly and offer it in an email on your site.  You’ll look different from the competition, and you’ll look like more of an expert.  It will help you in listings as well.