Absorption Rate is a metric used by some real estate professionals to measure a market’s internal supply and demand. It basically utilizes the current inventory of homes (supply) and recent sales history (demand) to calculate the market’s current sales rate.
For example if a market has 1,000 current listings and a sales history of 2,000 homes per year, the annual absorption rate would be 1,000/2,000 = 0.5. Thus our example market has an inventory absorption rate of 50%. A percentage below 50% means more homes are being sold than listed (supply is decreasing). A percentage above 50% means that more homes are being listed than sold (supply is expanding). A 50% absorption rate indicates a 6 month supply of inventory and this is characterized as a balanced or transitional market.
The good thing about absorption rates is that they scale very nicely to specific neighborhoods and price ranges. So how can an absorption rate study assist buyers and sellers?
Narrowing an absorption rate study to a specific type of home, in an explicit neighborhood, at a particular price point, enables a buyer or seller to first determine the nature of their local market (i.e., is it a buyer or sellers market) and then establish a listing or offer price accordingly.
The local market type is often characterized by the absorption rate as follows:
Buyer’s Market: Over 7 months of supply
Balanced/Transitional Market: 5 to 7 months of supply
Seller’s Market: Less than 5 months of supply
However we need to express some caution here, to ensure that we don’t convey the idea that an absorption rate is all you need to determine a market’s condition. Specific property features, its condition, and of course price will do more to determine how fast a property will actually sell than any statistical formula.
There are also a number of variations that can be applied to a localized absorption rate study to eliminate the annual sales rate smoothing and take into account seasonal trends. If you’d like to learn more about our method of applying this important statistic to individual neighborhoods and price points don’t hesitate to contact us. Better yet, if your a seller simply fill out our Instant Market Analysis form with your home and email address and we will do a Comparative Market Analysis with an absorption rate study specific to your home and email you the results with no obligation.