Absorption Rates

What is Absorption Rate?

The absorption rate measures the speed at which available homes in a specific area are being sold. It is typically expressed in months and indicates how long it would take to sell all current listings if no new properties were added to the market.

How is Absorption Rate Calculated?

To calculate the absorption rate in months of inventory, use this formula:

Absorption Rate (Months of available Inventory) = Number of Current Listings / Number of Properties Sold in the Last 30 Days

For example, if there are 200 homes currently listed and 50 homes were sold in the last 30 days, the absorption rate would be:

200 / 50 = 4 months

This means it would take approximately 4 months to sell all the current inventory at the current sales pace.

Interpreting the Absorption Rate

The absorption rate, expressed in months of inventory, helps determine the market condition:

• 0 to 4 Months of Inventory: Sellers’ Market – Indicates a shortage of homes, giving sellers the advantage with quicker sales and potentially higher prices.

• 4 to 6 Months of Inventory: Balanced Market – Supply and demand are relatively even, leading to stable prices and market conditions.

• More than 6 Months of Inventory: Buyers’ Market – Indicates an excess of homes, providing buyers with more options and negotiating power.

Why is Absorption Rate Important?

The absorption rate is essential for various real estate participants:

• For Sellers: Provides insights into potential market time and informs pricing strategies.

• For Buyers: Guides approach, especially in competitive markets where speed is crucial.

• For Investors: Helps assess market trends and identify profitable opportunities.

Understanding the absorption rate is more than just understanding a number; it reflects the current health of the market. By tracking this metric, buyers, sellers, and investors can make informed decisions aligned with their real estate goals, whether it’s navigating a sellers’, buyers’, or balanced market.