What Is Absorption Rate?

When selling your home, it can be very helpful to know how long it might be on the market. Real estate professionals have several ways of predicting this potential, but the most common and accurate is the absorption rate. Absorption rate refers to the rate at which homes sell in a given real estate market over a given period of time. It is useful to home buyers, home sellers and real estate agents in many ways.

What It Indicates

The absorption rate indicates how long it will take for the demand in an area to overcome supply. Put more simply: How long will it take for all the homes in a given market to sell? If the absorption rate is very high, this means that the number of available properties will decrease fast, while a low absorption rate means that homes sit for a long time. This can help predict how long it will take a homeowner to sell their property.

The supply of houses dictates “whose market” it is. If the supply of houses on the market will only last 0-4.9 months, it is a seller’s market. A supply lasting 5-7.9 months is a balanced market. If there is a large enough supply on the market to last at least 8 months, it is considered a buyer’s market. For example, if there are 30 listings in a neighborhood and 10 sell in the month, then it would take 3 months to clear the inventory; thus, it is a seller’s market.

How It Is Calculated

There are three important pieces of information that are needed to calculate absorption rate in a given market:

  1. How many homes are active on the market right now?
  2. What time frame are you looking at?
  3. How many homes sold during that time frame?

The two calculations that are then made are the rate of sales and the absorption rate. The rate of sales is necessary to find the absorption rate, and is calculated by dividing the time frame by the number of homes sold. Absorption rate is then determined using the rate of home sales, multiplied by the number of homes currently active.

How to Use It

Absorption rate is a vital factor in successfully setting the price of a property. By pricing your listing properly, you can sell your home faster. If the market is balanced with six months of homes available, this is an ideal situation. If there are more than six months of supply, then a buyer’s market is in effect. Likewise, lower than six months indicates a high demand and a seller’s market.

Real estate professionals can show clients these absorption rates, which can then be used as a factor in listing the home. Realistic pricing is of key importance in selling a property.

Negotiation Tactics

Supply and demand is the major factor in any transfer of goods or services and the real estate industry is no different. If conditions are right for a seller’s market, homeowners may be able to expect bidding wars for their property. Likewise, if it is a buyer’s market, now may not be the best time to put your home up for sale.

When the time comes for negotiation, both the buyer and the seller can leverage absorption rate to determine an acceptable offer for the property. This helps to keep things realistic and reasonable. It never hurts to have a solid metric for how the wind is blowing.