What is Absorption Rate, how do we use it, and why is it important?

What is absorption rate?

A phrase you may be hearing all over the news these days is absorption rate. Along with numbers of sales and median prices, an important figure for measuring demand in the real estate market is the market’s absorption rate.

The absorption rate compares the number of properties sold over a specific period of time to the total number of properties on the market.

A rate of over 20% is considered a seller’s market (a market where demand exceeds supply), while a rate of less than 15% is considered a buyer’s market (a market where supply exceeds demand).

How is absorption rate calculated?

There are three pieces of information we look at to determine this rate:

1. A specific time frame (such as 30 days or 3 months)
2. The number of sold properties during that specific time frame
3. The number of available/active properties currently on the market

Absorption rate is calculated by taking the number of properties sold within a specific period of time – for example, 30 days – and dividing that number by the total number of available properties on the market.

How is this rate used?

Here’s an example of how we use this rate as Realtors:

Sandy is looking to relocate to Arizona from Teton Valley and wants to list her property at a competitive price point to try to sell as quickly as possible. Sandy would like to know approximately how long it might take to sell her property.

As Sandy’s real estate agents, we take a look at the number of available properties in the past 12 months, 6 months, 3 months, and the monthly sales over the same time periods. We look for trends in the market, we run comparable analyses, and we look closely at absorption rate.

Let’s say there are currently 350 properties listed for sale, and 100 properties have sold over the past month. We would determine the absorption rate as follows:

Absorption Rate = 100 (properties sold this month)  / 350 (total currently active properties)  = 28.5%

Since the rate is over 20%, we would consider this a seller’s market, and we would let Sandy know that in the current climate, it might take about 3.5 months for all currently listed properties to sell (at the current rate of 100 properties/month). This gives us a general idea of how quickly properties are selling at current prices, and how quickly Sandy’s property might be expected to sell.

In a seller’s market where available properties don’t stay on the market for long, agents and brokers are able to price more aggressively, since there’s an elevated level of demand and greater competition for the supply of properties

Why is absorption rate important?

Calculating the absorption rate helps us estimate how long it would take to sell current inventory on the market based on sales over a recent time period. The rate also helps us understand if we’re in a seller’s market, buyer’s market, or somewhere in between. This is helpful information to have when we discuss pricing strategies with sellers and offer strategies with buyers.

In Sandy’s case above, we would take her goals and needs into account, look at the absorption rate, and suggest a pricing strategy accordingly.

Who else uses these rates?

Appraisers look at absorption rates (along with pricing and values) when evaluating what a property is currently worth. Builders also use these rates as a gauge to figure out whether to build more homes or wait for a seller’s market/increased demand before ramping up building projects.

For more articles about absorption rate and how it’s used in real estate, here are some helpful sources:

Rocket Mortgage

The Balance

Do you have questions about absorption rates or how the current market affects your goals? Please reach out any time – we would love to chat with you. We have decades of experience in seller’s markets, buyer’s markets, and everything in between, and look forward to helping you reach and exceed your real estate goals.

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