What is an Absorption Rate related to Real Estate? How do you calculate this number? Why this statistic is important whether you are a buyer or seller in your local real estate market!
The Absorption rate is a key statistic that will give you the rate in which homes are selling in months. It will give you an indication if you are in a buyer's or seller's market. This is especially important if you are a seller - it will indicate if you need to price your home aggressively and how long you can expect to be on the market.
The absorption rate is calculated by taking the current level of inventory divided by the average number of homes sold. The average number of homes sold can be calculated for a specific time period, typically 6 months or a year. They can be calculated by a particular location, housing type (single family, multifamily, condo, townhouses), neighborhood, or price point. It is important that your real estate agent calculate it for you by price point so you will be prepared with expectations related to pricing and competition of the market For example, if there are 60 homes for sale in a specific town and they are averaging selling at 10 homes per month, the absorption rate is 6 months. It will take 6 months for all the current inventory to sell, thus absorbed by the market. Absorption rates that are 6 months are considered a balanced market - an even number of buyers and sellers leading to harmony in the market. If the months of inventory are below 6 months, this is a sellers market and above 6 months is a buyers market. Below 6 months means that properties are selling quickly, there is a demand for inventory and many buyers in the market competition for the same properties. Above 6 months, sellers can expect to be on the market longer, inventory is higher giving buyers many options and choices. These homes must be priced competitively in order to sell in a sellers market.
Absorption rate is also synonymous with months supply of inventory. The rate is always changing. It doesn't take into account new inventory added to the market. It is important to calculate this number on a regular basis if you are selling in order to understand the market and pricing.
If you would like to know the absorption rate in your local market and price point, contact me and I would be happy to calculate it for you!