The Real Estate Absorption Rate

Fair Haven, NJ - November 9, 2011

Yesterday we started to answer the question, “How’s the Market?” for Fair Haven, Little Silver, Oceanport and Rumson. We found some data showing an improving market (more homes sold in 2011 vs. 2010; lower average DOM) but we found other data indicating a flat or slightly declining market (lower average and median selling prices). Today we’ll look at the Real Estate Absorption Rate.

The Real Estate Absorption Rate is a calculation estimating how many months it will take to sell all of the houses that are currently available for sale if the current rate of sales remains constant.  It can be calculated as a monthly number, a quarterly number, an annual number, or for any time interval you’d like to use. For the monthly calculation, divide the total amount of available homes by the number of homes that sold in the previous month. For example, 7 single-family homes were sold in Fair Haven in October, and at the end of the month 83 were active (i.e., listed for sale). The calculation is 83/7 = 11.9; based on this calculation, it will take 11.9 months for the current inventory of Fair Haven single-family homes to be sold (if homes continue to sell at the present rate). For Rumson, this number is 103/3 = 34 months.

However, remember what we said about statistics? When you’re dealing with numbers that are less than 20, you dramatically increase the possibility of error. In Rumson, where there were only 3 homes sold in October, we have to take the monthly absorption rate with a grain of salt because a change of just one sale in either direction would have drastically changed the calculated absorption rate. So instead of one month, let’s take a look at 3 months. To perform this calculation, we divide the [total amount of available homes] by [the number of homes sold in the past 3 months/3]. For Fair Haven, the calculation is 83 / (22/3) = 11.3, not too far from the 1-month rate, but for Rumson the calculation is 103 / (34/3) = 9.1, drastically different than the 1-month rate. In other words, based on the last 3 months, there’s an 11.3 months’ supply of homes in Fair Haven and a 9.1 months’ supply of homes in Rumson, presuming that homes in those communities continue to sell at the present rate.

Well, what do these numbers mean? For our area, in a normal (neutral) market, the real estate absorption rate varies between 5 and 7 (or, there’s a 5 to 7 month supply of homes on the market, presuming they continue to sell at the present rate).

Seller’s Market = less than 5 months

Normal Market = 5 – 7 months

Buyer’s Market = more than 7 months

So both for Fair Haven and for Rumson (and likewise for Little Silver as well as Oceanport if we had done the calculations), we’re clearly now in a “buyer’s market”, based on the real estate absorption rate for the last 3 months. However, if we look at the same 3 month period in 2010, the rates were 12.5 in Fair Haven and 14.0 in Rumson. To make this easier, let’s put the information into a table, and let’s add the data from Little Silver and Oceanport:

Town

2010 Abs. Rate

2011 Abs. Rate

Trend

Fair Haven

10.4

9.4

Sellers’ Market moving towards Normal
Little Silver

10.2

8.3

Sellers’ Market moving towards Normal
Oceanport

12.3

6.2

From Sellers’ Market  to Normal Market
Rumson

14.0

9.1

Sellers’ Market moving towards Normal

As you can see, the real estate absorption rate is shorter now than it was a year ago. When we add this information to the information we learned yesterday (more homes sold, shorter average DOM), it’s reasonable to conclude that the market is improving significantly in Fair Haven, Little Silver and Rumson, and has already returned to normal in Oceanport.

Hope this information was useful to you. If you’d like data for some other nearby towns, or if you’d like more targeted data (e.g., just for 4 bedroom homes) please call or email me. If you’d like to share any thoughts about the real estate market or if you disagree with my conclusions, feel free to comment  by clicking on the “Leave a comment” field below.

Leonard “Len” Dunikoski, SRES
Realtor Agent, Seniors Real Estate Specialist
Diane Turton Realtors – Rumson Office
8 West River Road
Rumson, NJ 07760
ldunikoski@dianeturton.com
(732) 530-6686 (office)
(732) 239-0739 (cell)

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This entry was posted in Fair Haven NJ Real Estate, Fair Haven Real Estate, Jersey shore, Little Silver, Oceanport Real Estate, Real Estate, Rumson NJ Real Estate, Rumson-Fair Haven and tagged , , , , , . Bookmark the permalink.

One Response to The Real Estate Absorption Rate

  1. Pingback: Fair Haven Home Sales in 2011 | Rumson Fair Haven Home

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