Tucson Absorption Rates vs Day On Market
June 7, 2007
Post Tags: Absorption-Rates , Days-of-Inventory , days-on-market , dom , Tucson Real Estate Market , tucson-real-estate-absorption-rate
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Absorption Rates
Jonathan Dalton in Phoenix is the first place I heard of the term Absorption Rate. His latest post is a good example Phoenix Real Estate Inventory as of June 5.
Recently a similar term has been used around our office “Days of Inventory” How many days would it take to sell off all the homes on the market if there weren’t any more homes added to the market.
Days On Market
High Days On Market (DOM) used to be considers a possible Red Flag on buying a property. It could mean there are issue with the property like:
- Deferred Maintenance or worse
- Structural Issues (settling)
- Infestation (termites, pack rats, etc.)
- Polybutylene piping
Price the #1 reason for High Days On Market in Tucson
However, in the current Tucson Real Estate Market the number 1 reason for high days on market is PRICE. There are a lot of homes that are priced to high for the market and they just sit there, the paper like to describe this as “Languishing on the Market”.
We still have a lot of people wanting to know how many days the home has been on the market. The thinking is that if it is high there might be some negotiating room. The answer to that is “Maybe”.
A better question would be, “What was it priced at in the beginning and how many times has it been reduced to where it is today?” Even if the home has been on the market 180 days if they just lowered the asking price yesterday for the fifth time since it was listed they probably won’t budge from that price very far.
Average Days on Market
The average days on market has sometimes been thought to be a gauge of how the market it doing overall. This isn’t the case here in Tucson for several reasons.
- A home can be re-listed and get a new clock on DOM
- As presented by the Tucson MLS is it an aggregate figure of all areas.
- Some areas in the overall figure greatly skew the overall average inflating the figure.
- Average Days on Market can included homes for sale that aren’t built yet.
Another thing that isn’t accounted for in the Days On Market figures is the number of new homes being built and population increases in the Tucson Area.
Absorption Rates as an Indicator of Market Health
The formula for figuring absorption rates:
- the number of total homes for sale last month
- divide that by the number of homes sold in the last month
- equals how many months it would take to sell off the current inventory
- This tells you how many months of inventory you have on hand.
It doesn’t go back to see what happened a year or more ago. It takes into account population changes and new construction on the market. It is a better indicator of the current state of the market.
The trend of the market can then be evaluated by looking back to previous months absorption rates and comparing them month to month as well as year to date.
A single figure for Tucson won’t give an adequate picture of what is happening in the market. Therefore, from now on we will be publishing each month the absorption rates for the areas of Tucson individually and overall for the market. Included will be the YTD figure as well for each area. This should provide a better way to evaluate the health and trends in Tucson Real Estate.
Other posts on DOM you might be interested in reading
June 7th, 2007 at 2:05 pm
Dave - I have been using absorption rate for some time. It is great for letting sellers know that their home will be on the market longer than they originally thought. Its fantastic for getting the price down to reality.
June 7th, 2007 at 3:41 pm
Doug, How true, and getting price down to reality is a key to getting the inventory and absorption rate where everyone is satisfied.