Real estate, like any other industry, has its share of jargon and acronyms that make perfect sense to those in the business, but may not be quite so crystal clear to everyone else. I was asked this week to explain what an absorption rate is, so I figured I would share it with all of my readers.
An estimate of the amount of sales or occupancy that can be anticipated over a determined period.
Absorption rates are not static numbers. Instead, they change, sometimes every day, as homes are put on the market for sale and as homes are sold or withdrawn from the market. The absorption rate at any given time is just an overview or snapshot of the current real estate market.
Absorption Rate Examples
In June 2008 there were 9 homes sold in Belle Chasse LA. At the end of June there were 67 active listings on the market. Assuming that 9 homes will continue to sell each month, Belle Chasse has a current absorption rate of 7.4 months (67 divided by 9). This rate will vary depending on how many new listings come on the market and if the current rate of sales is steady.
If the number of listings increases but the rate of sales does not, then the absorption rate will also increase. Continuing the last example, if in July 77 homes are now on the market and 9 are still selling each month, the absorption rate increases to 8.6 months (77 divided by 9).
Changes in the absorption rate indicate shifts in your local real estate market and are an important tool to use when pricing your home. If absorption rates have been climbing in your neighborhood, it is an indicator that there are not enough buyers for the area and your pricing should be more aggressive. Just like a sponge, there is a point when the market becomes saturated and can’t support any more listings. When this happens, homes will linger on the market and take much longer to sell.
How do the absorption rates affect you?
There really are no “good” or “bad” rates, because each has a benefit to someone, whether a buyer or a seller.
- A balanced real estate market has around a 5-6 month absorption rate
- A seller’s market has a less than 5 month absorption rate
- A buyer’s market has a greater than 6 month absorption rate