The average amount of homes sold during a specific timeframe. Used mainly to evaluate the speed and flow of the market.
Absorption Rate Details
Absorption rate comes into play when you are thinking about selling or buying a home. To calculate the absorption rate, you'll look at the location of the contemplated property—in the case of a buyer who's unsure of the exact location, it could be a neighborhood, a street, or an even wider area—and a time frame, usually within 2-6 months before the current date. Though looking at an entire year is also helpful, looking at a recent market will help the buyer or seller understand the current market's flow. Also, recent political, economic, and social reasons can affect the market, so it's worth noticing how these external variables affect certain locations' absorption rate.
After you choose a location and time frame, you can calculate the absorption rate. If absorption rate were a math formula, it would look something like this:
# of homes in the area / # of homes sold per month = absorption rate.
A higher absorption rate means homes are selling quickly at regular prices, which favors a seller going into the market. Lower rates, however, means homes are barely selling, and most likely, it means that supply is exceeding demand (although other external factors might affect the market on rare occasions). This favors the buyer. Sellers will want to appeal more to the few buyers and prepare special offers to sell the property.
Example of Absorption Rate
If a man living in a particular neighborhood wants to leave the state, he must first sell his house. This man and his real estate agent discovered 36 homes sold in their neighborhood that entire year (three homes per month). If the whole neighborhood is currently putting up ten homes for sale, including the man's home, it means that at most, he'll have three months and a few weeks before his house sells.
In another example, there are 100 homes for sale. During the first month, ten homes sold. The absorption rate for that month is 10%. If the absorption rate remains steady, it's safe to assume that around ten homes will sell each month. Meaning that a buyer will have nothing if he waits for more than ten months to buy a home, and the seller will have to wait for an estimated maximum of ten months for his house to sell.
Significance of Absorption Rate
Anyone who wants to buy or sell a home has to think about the near future, like moving, work, family, etc. Knowing the absorption rate gives a good idea of how long a property will sit on the market before it sells. Comparing the average prices of previous sales and considering the absorption rate, the seller can select a price to either speed up the sale or stretch it out. It depends if the seller wants to sell quickly or not.
The absorption rate is also an indicator of when is the most optimal time to take action. If the rate is low, it means that a seller should hold back and wait. As a buyer, however, recognizing that rates are low means they should jump into action. They are more likely to find a reduced price from sellers looking to get rid of the property as soon as possible. Absorption rate is a straightforward concept but a very powerful tool.