I found this excellent article on About.com, in their extensive Real Estate section. Although the information makes reference to American companies Freddie Mac & Fannie Mae, it is none the less relevant to the milton ontario real estate market. The article is aimed at real estate agents, but that’s a good thing as it gives you information that many homeowners won’t have! For more on the local absorption rates, see my most recent posts on this blog.

Whether it’s the listing presentation meeting, or you’re following up with a seller who’s been listed a while, provide the added service of helping the real estate seller to understand absorption rates and how their price falls into the pool of available homes for sale. Absorption rates are now required from appraisers for all government related loans; which is just about every loan.

CMHC, the Federal housing organization, also takes the absorption rate into account; the role the absorption rate plays in a funding decision is dependent on the type of loan, area the property is in, etc.

Fannie Mae’s Form 1004MC, and Freddie Mac’s Form 71 both require that appraisers calculate days on market, inventory levels, and absorption rates for the comparables and immediate area around the subject home. The assumption is that tracking the variability of these three measures across time periods can provide trend information to determine home value direction. So, what’s absorption rate?

Example of Absorption Rate Calculation – Let’s say that we take the number of settled sales for the last six months in a certain area, and it is 120. We then check the current number of active listings, and it is 520 in that area. First, divide the 120 sales by 6 months, to get a rate of 20 closings per month. Then, divide the 520 active listings by 20 to arrive at 26 months to move that inventory; that’s the absorption rate.

Using Freddie Mac’s Form 71, we see that they require this number for three time periods; the immediately preceeding three months, four to six months back, and seven to twelve months in the past. Then, the appraiser must indicate whether the absorption rate is decreasing, stable, or increasing. If it’s decreasing, then the market appears to be slowing, and this could cause the value of the home to be adjusted downward.

As a homeowner considering selling your home, the absorption rate, when viewed in an historical perspective, can be an extremely informative tool in planning when to sell, how long to expect the sale to take, etc.

Also considered are corresponding periods for days on market, inventory, and the sale-to-list price ratio.

If sale prices are getting lower in relation to list prices, this will be evident on these addendum forms, and the appraiser should be adjusting the home value downward. So, it’s clear that a good market is showing higher absorption rates, lower inventories and shorter times on market on average. They prefer to use “median” numbers by the way.

On the bad side, if median absorption rate is declining, and days on market and inventory are rising, this doesn’t look good for the market in the near term. Couple that with wider spreads between list and sale prices, and the picture darkens as well. But, good or bad news, you should be on top of this information and sharing it with sellers and prospects to help them in their decision processes.