Priscilla Toomey: What Is 'Absorption Rate' and What Does It Tell Us about Bronxville Real Estate Market? Print

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May 25, 2011:  When 13 single-family homes came on the market in Bronxville Village between May 1 and May 15, it looked as if a sudden buildup in inventory would further saturate the local real estate market.  Would it?

The "absorption rate" is the rate at which homes sell in a particular area.  It is a way of quantifying how the market is doing by using the number of sales in a specified category for a given period to determine how long it would take the market to absorb the number of homes currently on the market in that category if no more homes came on the market.  Essentially, it quantifies the ratio between supply and demand.  This ratio can be measured by using monthly sales figures or data covering a longer period.  Yearly sales figures are probably more telling.

For example, at the moment, there are 69 single-family homes (including townhouses) on the market in Bronxville Village and 76 homes that have sold within the past 12 months, meaning that, if no more homes come on the market, it should take a little less than a year for those homes currently on the market to sell.  For example, in Bronxville Village, 27 single-family homes with asking prices of $2 million or more are currently on the market, and 27 sold in the past year, meaning there is a one-year absorption rate.  Similarly, there are 15 townhouses currently on the market, and 15 have sold within the past year, which is, again, a one-year absorption rate.

Clearly, the above ratios indicate that we are still in a buyer's market.  If the absorption rate were only a few months, say fewer than 4 months, this would indicate a seller's market.  A six-month absorption rate, give or take, would indicate a market that is fairly evenly balanced between buyers and sellers.  Where the absorption rate is seven months or longer, it is generally recognized as a buyer's market.

What did the first four months look like in Bronxville Village compared to the same period last year?  Between January 1, 2011, and April 30, 2011, 8 single-family homes closed, as did 1 townhouse, 2 condominium apartments, and 9 co-ops.  During the same period last year, 11 single-family homes closed, as did 3 townhouses, no condominium apartments, and 11 co-ops.

Currently, there are 54 single-family homes (not including townhouses) on the Bronxville Village market, plus 1 under conditional contract and 11 with sales pending.  Fifteen townhouses are currently active on the market, 1 is under conditional contract, and there is 1 with a sale pending.  There are no condominium apartments currently on the market for sale, but sales of 4 have closed since the beginning of the year.  Fifty-one co-ops are currently on the market, 7 are under contract, and the sales of 3 are pending.  Since last month, this represents the net addition of 12 single-family homes, 4 townhouses, and 5 co-ops to the market.

Because the absorption rate is a bellwether of the market, the net additions reported above mean it is likely to take longer for homes to sell going forward, because inventory is rising.  This is clearly better news for buyers than for sellers.  A balanced market, with an absorption rate of about six months rather than the current one year, would help all around.  I will continue to track the absorption rate monthly going forward to see how it changes and whether we are getting closer to the six-month mark.

Mortgage interest rates were again down fractionally compared to the rates a month ago.  According to BankRate.com, 30-year conventional fixed-rate mortgages were at 4.56% in mid-May, versus 4.78% in mid-April.  Fifteen-year conventional fixed-rate mortgages averaged 3.80% in mid-May, versus 3.99% in mid-April.  Five-year adjustable-rate mortgages averaged 3.13%, versus 3.30% in mid-April.

Real estate has always been cyclical, and every indication is that it will continue to be.

Editor's Note: Priscilla Toomey (JD, ABR, Top5, Certified Eco-Broker, SRES) is an associate broker at Bronxville-Ley Real Estate and can be reached by cell at 914-559-8084 or by email at CLOAKING .