Absorption Rate. What is it? And why do I care?
You may have heard the term absorption rate used to describe the health of the real estate market in your area.
What is it?
I’ll give a quick example using random made up numbers.
In the last 3 months (90 days), 765 homes have sold.
Right now there are 1302 homes for sale.
Here’s how we calculate the absorption rate in this fictitious market.
90 days/765 homes gives you the length of time to sell one home. In our case, that’s .11764 day to sell one home.
When we multiply the number of homes for sale right now (1302) by the length of time to sell one home (.11764), we come up with 153 days, or approximately 4.8 months.
Therefore, in this example, the absorption rate is 4.8 months.
That’s how long it will take the homes available on the market now to sell.
This number gives us a quick and dirty read on the market. A rule of thumb is that in a normal market, the absorption rate will be 5-7 months.
If the absorption rate is less than that, properties are selling strongly and we have what is called a seller’s market. Longer and we have the reverse, a buyer’s market.