Absorbtion Rate - Evolution Realty
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Absorbtion Rate

1) ABSORPTION RATE- Important concept for Sellers.

Years ago, I heard a well-respected trainer (David Knox from the USA) use this term and have adopted it since.

It isn’t mumbo jumbo, it actually makes perfect sense.

How many properties in a particular market segment can a market absorb over a given time?
  • In layman terms, the terms oversupply or under supply are a more general term for this phenomenon
  • Whereas Absorption Rate is more quantifiable

This is very important to understand how many sales in your market segment have occurred in the past 6 months OR ANY GIVEN PERIOD and how many competing properties are on the market right now?

WHY?

The alternative is to be blinded as to the state of the actual competition and/or having inappropriate or incorrect expectations around timing and strategy, required to stand out in a competitive market.

It is ALWAYS better to have FACTS and know the true start of the reality. In this way wise decisions can be made as to how to deal with various offers, AND even down to when to launch the property on the market.

EXAMPLE: (Let’s say your property sits at around $1.5M) It could fit either into the $1.25M to $1.5M market segment, or the $1.5M to $1.75M one. It can be helpful to analyse in this example what is happening in both segments.

E.g. If 12 homes are on the market at a particular time of a particular type or price range (Insert any number, it doesn’t matter).

What we want to know is this;

  1. How many of that category are on the market right now?
  2. How many days has that segment been on the market (unsold stock)
  3. How many have sold in the past 3/6/12 months
  4. How many days did they take to sell?
  5. Anything special/ noteworthy about how they were marketed?
That should paint the picture.
  • If in the past 12 months, 6 of that type sold
  • It means there is currently 2 years worth of stock, or one sale every 2 months
  • Assuming no listings rested or new stock comes on
  • As a seller, I would want to know that if I were coming onto the market.

Those 11 others are all competing with yours if you were one of the 12 on the market.

No property is ever selling in isolation, it is always in competition to everything on the market.
  • Buyers will always comparison shop for value
  • They might be a lesser home if there is a significant price advantage
  • That might be in a lesser location too
  • They may also consider the alternative to build unless there is a cost advantage to buy established

In other words, Buyers will rarely pay replacement value for established homes in the current market. They used to when building prices were going up and real estate prices were running away. That time was more than a decade ago now though (up to 2008).

2) MARKET SEGMENT

Many years ago, I started using a term which I called “Market Segment” in response to the recognition that the spread of price range in prestigious suburbs like Applecross, Mount Pleasant and Attadale etc. was huge.

You could have properties for $400,000 right up to $10M plus.

So, when buyers ask me things like “What is the average price per sqm of land in Applecross?”

Or I see reports of official data such as “the average days on market was 63 days”, sometimes I want to either laugh or scream or reach for a bucket.

>There are so many variables.

The reality in the areas I work (Mainly City of Melville) it is never the norm or the same as that reported as “average”.

There is no sensible way to talk norms or averages in areas that has such a massive variation of properties and values.

EXAMPLE: I divide Applecross and Mount Pleasant into 10 segments

  • Essentially to make some sense of what was happening simultaneously in the same suburb, depending on price.
  • I measure days on market for unsold stock, sold stock, average and median values and days.
  • It paints a vivid picture of contrast, and is fascinating to monitor and understand. All buyers and Sellers must understand this concept to fully appreciate what is really happening in their respective market at that time.

I often see some price categories (Market segments) take 300 plus days to sell

  • & sometimes we see properties on the market 3 or more years.
  • Imagine that!!!


3) DAYS ON MARKET: – How accurate is it?

I also see a huge manipulation of data by some reporting, depending on who you listen to.

There are many tricks to artificially reduce days on market.

  • Which make a lot of industry data inaccurate
  • & even irrelevant on official and leading industry websites, and media.
Did you know?

A property listed with 3 agents for 100 days each…

  • That changes agents as soon as the listing expires…
  • And sells with agent number four in 3 days…
  • Is recorded as selling in 3 days…

I regard that information as incorrect; the real figure is 303 days.

ALSO, properties can be pulled up and down off the internet or signs come off or up (at Agent will) yet are never really off the market.

  • You see them go up again with the same agent a week later as “new” online that is manipulation of data and not accurate
  • We regard that as not a new listing at all a property totally off the market for 60 days or more, off all websites AND Sign down AND out of the agent window is then considered off the market.

“Coming soon” or “Market launch date” is sometimes another way to try to create a perception of lower days on market while in reality the property has been on the market days or weeks, sometimes months and one case I saw,  2 years, yet was relaunched by the same agent as “Coming soon”.

We correctly and accurately record the very first date a property is ever seen in the market as the launch date, be it;

  1. For Sale sign
  2. Internet with an address or not
  3. Or any print media
  4. Agent window

I hope these points have been helpful.

Thank you.