What is “Absorption Rate” in Real Estate
by Dave Williams
In the real estate business, we toss around a lot of terms and unless you’ve spent substantial time preparing for your real estate transaction some of them are bound to go over your head.
Fear Not, for our new series of Real Estate Terms will help you sort them out.
Today I`ll tackle the “Absorption Rate” & “Absorption Period”, which is our fancy term for how quickly homes are selling in a given region, price range, style or type of home design.
Absorption Rate; The given number of homes that will sell in a specific amount of time, typically a month or the % of new properties for sale that sell in a given month,
Absorption Period; the given amount of time it will take the current inventory of homes to sell.
One reason real estate industry professionals will talk about the absorption rate & absorption period is to help describe what sort of real estate market we are experiencing. A high absorption rate, or quick absorption period can indicate a sellers market while a low absorption rate, and long absorption period may be indicative of a buyers market.
This rate can also help us narrow down the picture to a specific style, type or price of home and how it differs from the market. Let’s look at a few examples to help explain these terms.
6 months of a year have gone by, there have been 6,000 home sales and there are 12,000 homes for sale, 2000 of which we’re newly listed last month.
The absorption rate for this market is 1,000 homes a month, (or 50%) while the absorption period is 1 year. While a thousand homes selling a month sounds like a good market, the fact that it takes a year to sell all the homes for sale would describe it as a buyers market, and that’s assuming no new homes are listed for sale. In (our fictional city’s) reality there are going to be a high rate of homes not selling, sellers deciding to stay put and taking their homes of the markets, and tough negotiations as the buyers have control of the offers.
This could further be narrowed down by area or region. Taking a look at a specific neighbourhood (say we call it Green Gables) we find that 60 homes have sold in the same 6 months, and there are only 20 homes currently for sale.
In our fictitious neighborhood of Green Gables we have an absorption rate of 10 homes a month and an absorption period of 2 months. This is a hot market, any number of those homes may have sold in multiple offers driving the selling price well above the listing price.
One last example, the condo complex Green Skies in Green Gables is responsible for 12 of those previously reported sales, and has 8 units listed for sale right now.
Green Skies Condominium Complex has an absorption rate of 2 condos per month and an absorption period of 4 months, which would be described as a balanced market.
Hope that helps.
Frequently REALTORS® will break the market down to the type, style, and price range of your specific home when pricing your home to sell in today’s market. You’ll find that a lot of times the general news about the market is far from the reality of your neighbourhood and price range. Sometimes it’s better, sometimes it’s worse, but it is almost always different from the headline on the city newspaper.