Real Estate Absorption Rate

In the real estate market, an absorption rate provides insight on the rate at which houses are selling. An absorption rate does not take into account additional homes that enter the market at various times. It only provides a figure based on the currently available data.

First, we are calculating the rate at which homes sell (Time Frame/# Homes Sold). For example, if 60 homes sold over a month period, the rate which homes sell would be 10/month. (I like easy math).

Then, by determining how many homes are available to sell, we can calculate our absorption rate. (# Currently Active Homes X Rate of Sales) Using the example from above, if there are 50 homes on the market currently and our rate of sales in 10/month, our absorption rate is 5 months. This means if no other homes cam on the market, we would be out of inventory (absorbed) in 5 months.

What That Means

Now, in market conditions with low absorption rates, a real estate agent may be forced to reduce a listing price to entice a sale. Alternatively, if recognizing the market has a high absorption rate, the agent can increase the price without potentially sacrificing demand for the home. The absorption rate is also important for buyers and sellers to follow as they make decisions on the timing of purchases and sales.

Normally, markets with an absorption rate greater than 6 months is in a buyers market and an absorption rate less than 6 months is in a sellers market.

Wrap Up

I hope that makes the subject a little more understandable. If you just read the text, go back and watch the video for the full walk through of the calculations.

Make sure you check out our latest market reports and put your new found knowledge of absorption rates into practice!