Monthly Sell-Through rates/ absorption rates

Michel Lafleur

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Apr 30, 2015
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#4
Sell-through rates are also known as absorption rates. Its an easy metric that's indicative of market health in a given area.

Monthly absorption rates for a city are useless - for example: one can say that there are currently 10,000 listings on MLS for a given city. Last month there were 1,000 new listings added and 1,000 listings that sold. That would be indicative of a balanced market (sales balanced with new listings). This example could help sellers understand that there's roughly a 10% chance of selling in any given month (if 1,000 sales/month and 10,000 total listings.) If there were 10 new listings and only 1 sale - this confirms its a buyer's market and suggests that sellers need to be competitive if they want to sell.

I find this metric most helpful in smaller areas such as a specific neighborhood. There are areas that see several new listings every month, even though few actually sell in a given year (low sell through rate = lots of inventory and/or not a desireable area.)
If the 1 or 2 listings per year sell quickly, its a desirable area.

As a Realtor I use this metric mostly to help set expectations about selling (competitive price & realistic timelines.)
For buyers this is a simple gauge to know how easy it should be to re-sell the property (assuming its a flip), or for competition if you are planning a rental property or if you plan to sell in the near future.
 

Michel Lafleur

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Apr 30, 2015
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#6
Looking at the month of May (2018) stats for Edmonton & area, there was a total inventory of 9859 residential listings. In May there were 4136 new listings, and 1776 residential sales. The absorption rate for May was roughly 18% (1776 sales out of 9859 listings.) The average (all residential) was 53 days on market leading to a sale. Keep in mind that this includes all residential (condos & detached houses), and sales vary widely by neighborhood & price point.

Getting more micro, here are 2 very different neighborhoods: Alberta Avenue versus Westmount. Both are fairly central and considered as mature areas with a variety of homes ranging from century homes to new infills.

Currently, Alberta Avenue has 85 active listings (single family - not including condos.) In the past year there have been 76 sales here. 76 sales/12 months = ~6.3 sales/month. With a residual inventory of 85 listings/6.3 sales per month = ~1.1 years of inventory (definitely a buyer's market for this neighborhood.) Your flow through rate would be 6.3 sales per month/85 listings = ~7.4% absorption rate. A 7% absorption rate doesn't give much confidence to sellers here, but tells buyers they can be picky and negotiate hard.

By contrast, Westmount currently has 27 active listings (single family - not including condos.) In the past year there have been 69 sales here. 69 sales/12 months = ~5.75 sales/month. With an inventory of 27 listings/5.75 sales per month = ~4.7 months of inventory (balanced market for Westmount.) Your flow through rate would be 5.75 sales per month/27 listings = ~21% absorption rate. a 1/5 chance of selling is fairly good odds for sellers; buyers should know to keep their negotiations tight or they risk missing out on the property they wanted in this neighborhood.

A totally different neighborhood is Skyrattler. There is currently only 1 active listing there (single family only - not condos.) There were 3 sales here in the past year. 3 sales/12 months = average .25 sales/month. 1 listing = 4 months of inventory, which is still technically balanced but closer to being a sellers market. .25 sales per month/1 listing = 25% absorption rate. Similar scenario - strong chance of selling here, and buyer have low inventory to choose from - they can decide to buy that 1 listing, or keep waiting until another listing shows up.

A downside to this metric is that it doesnt really account for the listings that didnt sell (expired, terminated etc.) Its presumed that those listing are re-listed and stay in the active inventory pile. MLS sales history also certainly doesn't capture all of the transaction history.

The other considerations are price point (way larger market for <$400k home than there is for >$1M homes.)
Some neighborhoods are highly desireable for families and see very few dedicated rentals/"investment properties", which also often have more expensive homes. The "really affordable" neighborhoods (such as Alberta Ave) tend to have cheaper homes, more tenants and less owner occupied homes.

Flow through rates/absorption rates are really just simple metrics looking at the health of the market in a given area. If you were to flip (or do a buy & hold) in one of these 3 neighborhoods, which are would you be most/least likley to purchase in? I know where I would choose....

Hopefully this is helpful
 

ThomasBeyer

Senior Forum Member
REIN Member
#7
Looking at the month of May (2018) stats for Edmonton & area, there was a total inventory of 9859 residential listings. In May there were 4136 new listings, and 1776 residential sales. The absorption rate for May was roughly 18% (1776 sales out of 9859 listings.) The average (all residential) was 53 days on market leading to a sale. Keep in mind that this includes all residential (condos & detached houses), and sales vary widely by neighborhood & price point.

Getting more micro, here are 2 very different neighborhoods: Alberta Avenue versus Westmount. Both are fairly central and considered as mature areas with a variety of homes ranging from century homes to new infills.

Currently, Alberta Avenue has 85 active listings (single family - not including condos.) In the past year there have been 76 sales here. 76 sales/12 months = ~6.3 sales/month. With a residual inventory of 85 listings/6.3 sales per month = ~1.1 years of inventory (definitely a buyer's market for this neighborhood.) Your flow through rate would be 6.3 sales per month/85 listings = ~7.4% absorption rate. A 7% absorption rate doesn't give much confidence to sellers here, but tells buyers they can be picky and negotiate hard.

By contrast, Westmount currently has 27 active listings (single family - not including condos.) In the past year there have been 69 sales here. 69 sales/12 months = ~5.75 sales/month. With an inventory of 27 listings/5.75 sales per month = ~4.7 months of inventory (balanced market for Westmount.) Your flow through rate would be 5.75 sales per month/27 listings = ~21% absorption rate. a 1/5 chance of selling is fairly good odds for sellers; buyers should know to keep their negotiations tight or they risk missing out on the property they wanted in this neighborhood.

A totally different neighborhood is Skyrattler. There is currently only 1 active listing there (single family only - not condos.) There were 3 sales here in the past year. 3 sales/12 months = average .25 sales/month. 1 listing = 4 months of inventory, which is still technically balanced but closer to being a sellers market. .25 sales per month/1 listing = 25% absorption rate. Similar scenario - strong chance of selling here, and buyer have low inventory to choose from - they can decide to buy that 1 listing, or keep waiting until another listing shows up.

A downside to this metric is that it doesnt really account for the listings that didnt sell (expired, terminated etc.) Its presumed that those listing are re-listed and stay in the active inventory pile. MLS sales history also certainly doesn't capture all of the transaction history.

The other considerations are price point (way larger market for $1M homes.)
Some neighborhoods are highly desireable for families and see very few dedicated rentals/"investment properties", which also often have more expensive homes. The "really affordable" neighborhoods (such as Alberta Ave) tend to have cheaper homes, more tenants and less owner occupied homes.

Flow through rates/absorption rates are really just simple metrics looking at the health of the market in a given area. If you were to flip (or do a buy & hold) in one of these 3 neighborhoods, which are would you be most/least likley to purchase in? I know where I would choose....

Hopefully this is helpful
Well analyzed Michael. It shows averages are useful but specifics are always better.

That’s why I trademarked this rather silly saying: People have drowned in rivers one foot deep on average.

In other words. If you stand in two buckets full of water, with one foot in each, and the one bucket of water is 5 degrees and the other 55 degrees, are you on average standing comfortably as it is 30 degrees on average?

I conclude it helps to have a good realtor as part of your team so one can separate the good deals from the average ones !!


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com
 
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Matt Crowley

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Dec 14, 2013
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#8
@Michel Lafleur great post. Any idea on the effect of absorption on the bid/ask spread? (ie. <20% absorption expect average of 10% variance from list, 50% absorption expect 3% from list)

You seem like a numbers guy, what is the best neighbourhood index / valuation metrics that you use? Anything public? I wish there was a system that valued land across neighbourhoods, surveyed the height and width of a house then and determined the replacement value based on age of the neighbourhood. Hard when few land comps but houses are made of wood with really identical process so not actually that variable in pricing to construct.

I'm a bit surprised how slow real estate has been tech. Some interested companies popping up south of the border right now, although I don't think they have they idea quite right https://www.opendoor.com/,
 

Michel Lafleur

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Apr 30, 2015
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#9
I honestly don't find absorption rate or flow through rates all that helpful per se. I wish it was more helpful as its a simple calculation to do for Realtors or anyone with access to the MLS sales data. My opinion is that this metric is highly correlated with the old real estate adage: location, location, location. To come up with the best price for a given property, I always suggest working with a Realtor who understands the market and numbers (not just any Realtor.) If a buyer/seller chooses to work alone without a Realtor, then hopefully they've done their homework and are geographic experts.

In general, I would say that the higher the absorption rate, the more the deal tends to be in favor of the seller. Basically this gives the seller confidence that they can sell at a reasonable price within a reasonable timeline. Some buyers may still try to lowball the offer, but the sellers can stay firm at their price/terms knowing they have a good chance of selling with or without that buyer. Educated buyers or those who have been diligently watching that neighborhood will typically present a stronger offer knowing the market dynamics of that neighborhood.

A metric that I use when really analyzing a property for a given neighborhood is the $$/ft2 price of comparable homes sold in that neighborhood. Many times when I do a CMA for an area I will see the average list price works out to say $300/ft2, but the average sold price is $260/ft2. I base my suggestions (for a list price, or reasonable offer price) on what actually sold, not what people are asking today.

An easy example I often see is the classic 1000ish ft2 bungalow. In Edmonton there are so many of them all with basically the same floor plan and built in the same era. Circling back to the neighborhoods I mentioned above, that bungalow in Alberta Ave sells for ~ $223/ft2 whereas the same bungalow in Westmount is ~$459/ft2. Value is more about the location/neighborhood than it is about the house itself. Supporting the value of location, that bungalow in Alberta Ave might be way nicer (perhaps fully renovated with a nice garage), but buyers will often choose to pay almost double ($$/ft2) to buy an "outdated but solid" version of that house in their preferred location.

Thus far in 2018 Ive noticed that the homes which are priced properly are typically selling in <2 months for >97.5% of list price. With your average home sale price ~ $400k, that means taking ~ $10k off the list price is common. If they are underpriced, bidding wars happen and they sell quickly above list price (ie: listed @ $295k but sold for $300k.) If they are overpriced, they don't sell and don't count towards the MLS sales data after they expire on MLS (when they expire, they arent included in the "average days on market" metric.)
 

Matt Crowley

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#10
Kindof my point is that all you are pricing in is land=location, so find the $PSF of land in the area + cost of the building and voila, easy valuation.

My prediction is that in the next 5 years, someone is going to break open the MLS and it will be public data. When assets are selling for 10% off list, the listing prices do provide great guidance for current market, then just look at the % sale price, and anyone can tell what a home is worth. Truly a joke that sales data is hidden from customers.

I do know of one tech company in Calgary that just raised a couple million to do something like OpenDoor, I'm definitely rooting for them. I think it is a lot less complicated than it is made out to be, and the emotional factor is overestimated. It is just communicated poorly.
 

Michel Lafleur

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Apr 30, 2015
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#11
The land valuation model certainly has some merits; in the end real estate values certainly have more to do with the land than the structures on that land. If everyone bought just the land, demolished the house and built from scratch, then I think this would be a more pragmatic approach.

I dont think Realtors are going anywhere anytime soon, and see significant value that we can bring to clients. Transacting real estate can be a stressful & emotional experience for many people; they want support & guidance, and to know that someone is looking out for their best interests. I know of many scenarios where consumers purchased or sold without a Realtor, only to regret it later. As much as some people dont like that Realtor's charge fees, there is nothing preventing FSBO's, Comfree's or sneaky investors from pulling the wool over a buyer's eyes to complete a sale to their perosnal advantage. Similarly, I know of some investor's who managed to convince a seller to let go of a property way below market value, just so that they could turn it around for a 6 figure profit. How is that fair for sellers? There are many scenarios where a Realtor is well worth their fee for sellers or buyers.

When comparing 2 pieces of land in the same area, its helpful to gauge how much better/worse a property is compared to the 'average'.
If resale values were based just on land values, then where's the appeal in upgrading or repairing your home before selling? Why would someone flip a property? How would one valuate 'move in ready' vs a 'fixer-upper' when looking only at the $$/ft2 of land?
There needs to be a way to account for the costs of say granite vs laminate counters, or new windows & shingles vs original items, or a cracked leaky foundation versus a solid foundation with weeping tile & a sump pump. There's the cost of the work, the time & effort to get it done, and a premium to be paid for making that property exactly what a buyer is looking for. There will always be an emotional component of a property transacion. There will always be reasons one wants to buy in a given area, or why they prefer a certain style of home, upgrades & features. And tThere will always be a reason that a seller wants to sell.

In some provinces the MLS data is already public knowledge. In AB they have been talking about it. MLS data isn't public info yet, but finding out what a house sold for is quite easy to do as land titles is public information. For $10/title you can find out who owns the property, and what the "consideration" was when they bought.

I think that companies like OpenDoor or Zillow are likely to make good $$ in the near future. Rather than Realtor's making money, it'll be the software developers or programmers, whomever figures out the platform that works. In the modern world, people want to do as much as they can for as cheap as they can using online tools. I know these platforms will start to shift some business away from Realtors> also see it as an opportunity to work harder to earn business and add value for those who choose to work with a Realtor.