What Is the Absorption Rate?
The absorption rate in the real estate market is used to evaluate the rate at which available homes are sold in a specific market during a given time period. It is calculated by dividing the number of homes sold in the allotted time period by the total number of available homes. This equation can also be reversed to identify the amount of time it would take for the supply to be sold.
- The absorption rate is a term most commonly used in the real estate market.
- Evaluating the rate at which available homes are sold in a specific market during a given time period is the purpose of the absorption rate.
- Traditionally, an absorption rate above 20% has signaled a seller's market and an absorption rate below 15% is an indicator of a buyer's market.
Understanding the Absorption Rate
In the real estate market, the absorption rate provides insight into how quickly or slowly houses are selling. An absorption rate does not take into account additional homes that enter the market at various times since it only provides a figure based on the current available data. A high absorption rate may indicate that the supply of available homes will shrink rapidly, indicating that a homeowner will sell a piece of property in a shorter period of time. Traditionally, an absorption rate above 20% has signaled a seller's market in which homes are sold quickly. An absorption rate below 15% is an indicator of a buyer's market in which homes are not being sold as fast.
Real estate professionals, such as brokers, use the absorption rate in pricing homes.
Influence in the Real Estate Market
For example, 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.
Additionally, the absorption rate can be a signal for developers to start building new homes. During market conditions with a high absorption rate, demand may be high enough to warrant the further development of properties. Meanwhile, periods with lower absorption rates indicate a cooling period for construction.
Finally, appraisers utilize the absorption rate when determining the value of a property. Some appraisal procedures require an addendum showing that absorption rates were considered in appraisal calculations. In general, appraisers are responsible for analyzing market conditions and maintaining an awareness of the absorption rates for all types of appraisal values. Most appraisers include this data metric in the neighborhood section of the appraisal forms. Overall, the current valuation of a home would be reduced during periods of decreased absorption rates and increased when absorption rates are high.
Example of the Absorption Rate
Suppose a city has 1,000 homes currently on the market to be sold. If buyers snap up 100 homes per month, the absorption rate is 10% (100 homes sold per month divided by 1,000 homes available for sale). This also indicates that the supply of homes will be exhausted in 10 months (1,000 homes divided by 100 homes sold/month).