The standard calculation for absorption rate takes the number of homes that are available and divides that by the number of homes sold over a period of time to determine how long it takes the market to ‘absorb’ (sell) all the properties. That part sounds fine and makes perfect sense.
To explain it – if we sell 100 homes per month and there are 1,200 homes on the market, it would take 12 months to sell all of those homes.
Of course you are wondering why I would even bother bringing this up and arguing a standard method of calculation. If you look around and read the explanations of absorption rate, one of the key phrases that you will read frequently is that ‘absorption rate is not an exact science.’ That’s why I’m challenging the methodology of determining the calculation.
The part that concerns me is the definition of the ‘available’ homes, which is why I’m writing this blog. I don’t agree that a home is ‘available’ if it isn’t sold. Homes that are ‘contingent’ and ‘pending’ are under contract and at various stages of the sale process. No, those aren’t sold, but they technically aren’t available either. My belief is that these homes don’t fit in either category. If they sell, they count toward sales. If the deal falls apart, they go back into available inventory. So, they don’t count while in limbo.
As a real estate professional, I do not take my clients out and show them homes that are currently under contract. I would venture to guess that most agents feel the same way. Why waste the time of the client, and possibly show them a home that they fall in love with, only to tell them that it is under contract and they can’t have it unless the other buyer backs out? Yes, in some cases this does happen, but it isn’t significant enough to consider these properties available for sale. Don’t you agree?
The homes that are under contract exist, and there are many statistics that we refer to these properties for – but absorption rate should put these properties in a neutral category, where they don’t count for either side of the equation.
As of this writing, there are approximately 25,000 homes in Las Vegas that are available, contingent and pending. Of those, only 12,000 are not under contract.
Those 12,000 are the ones I’m showing my clients, and the ones that my sellers are competing against for offers. When I’m out with my buyers and they tell me they want to make a ‘low’ offer on a property to get a ‘deal’ – that is when the fictional absorption rate distorts what I need to tell them. With 25,000 homes on the market, they believe they can offer 10-20% below list price right? That’s a lot of homes and that is what the media is telling them. Yet they can really only choose from 12,000 if they want to get an accepted offer and be under contract to get to a closing.
In the Las Vegas real estate home market right now, homes are selling for 96-99% of list price and it is a Seller’s Market, if you use my calculation and leave out the contingent and pending homes. If you include the under contract properties, it’s somewhat of a neutral market. Yet when we look at the final sales prices of homes, closing at 96-99% of list price, it supports the Seller’s market theory, which I determine based on absorption rate using only available homes.
The skewed absorption rate and ‘available’ homes information that the media reports makes it challenging to explain to my buyers that the Las Vegas home market isn’t what they think and that the offers they submit must be reasonable.
Those ‘25,000 homes on the market’ stick in their head.
For a while.
Then they find a great little house, write an offer, and what happens next – we get a notice that the property is in a ‘multiple offer’ situation. Reality finally sinks in after a few of these situations.
This is what is ACTUALLY HAPPENING, and I have many buyers that can confirm that this is what they are experiencing.
Bottom line – there are only 12,000 homes available, in my opinion. That is the number I work with every, single day. That is the number that is important to my buyers and sellers. That is the number that determines where my sellers price their properties, and how much my buyers are willing to offer. It doesn’t matter that there are another 13,000 homes out there that are under contract because my buyers can’t have them.
Therefore, my absorption rate calculation will leave all those Little Houses in Limbo where they belong, until they either sell or come back on the market.