Absorption Rate and Appraisals

There are numerous sources about the use and formula(s) associated with Absorption Rate, but nothing addressing this topic, specifically, for its use by Appraisers. Here, I am providing a simple explaination of its use in appraisals for the benefit of non-appraisers.

Definition: Absorption Rate is the mathematical representation of the relationship between supply and demand. In the Real Estate Industry, it is the calculation of how long it will take the inventory available, to be absorbed by the current market.

Realtors/Agents use Absorption Rate for their listings, and with their Buyer/Seller clients to help determine a selling/purchase price, and get an idea of how long it will take for the property to sell, at a specific price. Appraisers can benefit by using and including the Absorption Rate in their reports. And the Absorption Rate Analysis can increase the accuracy and creditability of the report.

Absorption Rate is also a good indication and useful tool for appraisers to determine market conditions, performance, and trends. It is especially helpful in accurately determining the Housing Trends or Market Trends on the URAR (Uniform Residential Appraisal Report), or GPAR (General Purpose Appraisal Report), to correctly determine which boxes to check regarding -- Property Values (Increasing, Stable, Declining) -- Demand/Supply (Shortage, In Balance, Over Supply). While most appraisers will conduct the necessary research of comparables sold, active/pending competative listings, and Days on Market (DOM), they will not take the extra step to calculate the absorption rate with the information at hand, and include supporting comments explaining their analysis and its effect on value. Others are doing it without realizing it, but don't include comments, regarding the absorption rate, in the "canned" comments already included in their report.

The Formula: The basic formula for calculating the rate is simple, and can be used for any type of property being appraised (Single Family, Multi Family, Condo/Townhouse, Manufactured, Small Income Producing, Commercial, Land, etc). AACAZ uses this formula and other data sources for a complete accurate analysis of the Housing Trends and Market Trends in each type of assignment. For simplicity, we will assume the properties are all detached single family residences (your basic house).

FIRST - Divide the total number of homes sold in one year by 12 (to determine the average number of homes sold in one month). SECOND - Divide the total number of current listings, by the number sold in one month. This gives you the Absorption Rate, or, the number of months it will take for the current market supply to be absorbed.

Example: Sold in 1 year - 39 comparables (page 2 URAR)
39 / 12 = 3.25 (sold in one month)
Comparables currently offered - 9 (page 2 URAR)
9 / 3.25 = 2.77 (Absorption Rate)

There are different variations of the formula, depending on who is calculating it and for what purpose. The example above is market area/neighborhood specific, since the sold and listings numbers from page 2 of the URAR, are for comparables, or more similar to, the subject property. For an accurate overall condition of the market, you would include ALL types of properties sold and ALL types of current listings - including listings not showing in the local MLS, such as FSBO, Foreclosures, REOs, and New Construction. The most common use by appraisers would be for, Market Area / Property Specific - similar to the subject property, as in the example above, Market Area / All - all residential properties within the subject’s market area, and Zip Code Area – City Level – Metropolitan Level – County Level – State Level.

Realtors/Agents would use, similar price or price range, as another search parameter. With different variations in the search criteria, the rate can be calculated for any time period (1 week, 1 month, 1 quarter, 1 year, etc) and for any specific area (neighborhood/subdivision, market area, zip code, area/grid, County, City/Town, State) or any combinations thereof.

With the use of spreadsheets (such as Excel) a template can be created for future use, and a Graph or Chart can be created for a more visual supporting explanation, to be included in the appraisal report. A short version of this blog can be read on AACAZ website along with other information.