October 16, 2014
The Absorption Rate
Real estate agents will often talk about inventory. What does that mean, though? If 10,000 homes are for sale, is that high inventory? In Crested Butte and Gunnison, the answer to that question would certainly be yes, but in a major metro area the answer might be no. And what about the buyers- shouldn’t their behavior factor into this somewhere?
Enter the absorption rate, also known as the turnover rate. Business managers of all sorts deal with this dilemma all the time- you don’t want to tie up your money with a product that sits on the shelves for long periods of time, and yet not stocking enough of a popular item is just as bad, since you will run out and customers will not be able to purchase the item. Obviously, there is a happy medium somewhere in between.
In real estate, the interplay between sellers and buyers is known as the absorption rate. It is calculated by dividing the number of properties sold in the previous year by the number of current listings. For example, if 120 homes sold last year and there were only 10 listings, the absorption rate would be 1 month, meaning all the available homes would be sold in 1 month if there were no new listings. Obviously this would be great if you were a seller. On the flip side, if 120 homes sold last year but there were 240 listings, the absorption rate would be 2 years! With a healthy number of both buyers and sellers, the absorption rate should be around 6 months, although I think it’s fair to add some time to that number in this market due to the influence of second home buyers and sellers.
The turnover rate in Crested Butte can vary quite a bit based on the neighborhood, or even the condo building! Staying on top of current market conditions is extremely important for both buyers and sellers- signing up for my monthly newsletter and market report is a great way to do so: