What is Absorption Rate?
Real Estate absorption rate is the rate at which a market absorbs or eliminates housing inventory. Markets are always changing: new inventory is being added and old inventory is being sold or absorbed. Absorption rate helps you to take that fluid, ever-changing market and bring it into a measurable snapshot.
Supply and demand is the principle that the value of any good or service will rise as demand increases and supply decreases, and fall as demand decreases and supply increases. Absorption rate helps us understand the demand for a particular type of home in the ever changing real estate market.
Calculate Absorption Rates
To calculate absorption rate, you need to determine the number of competitive properties currently on the market and divide that number by the number of properties that have been selling per month. This does not take into account the number of houses that will eventually come on the market in addition to those already for sale. For home sellers, absorption rates are like Golf Scores, the lower the better.
The National Association of Realtors defines the markets as follows:
- Sellers' market conditions—Absorption rate is 1–4 month
- Balanced market conditions—Absorption rate is 5–6 month
- Buyers' market conditions—Absorption rate is 7+ months
With the changing consumer mindset created by technology evolution, and average market times in different price points, these NAR rules for Seller and Buyer markets need to be adjusted for current market trends in average days on market.
Absorption rate calculation example: If 4 homes are sold every month and there are 44 homes for sale, it will take 11 months to sell all the homes currently for sale. If there are 80 homes for sale, the absorption rate will be 20 months or almost 2 years for all the homes to sell. Absorption rates can change rapidly if a number of homes come on the market or go off the market at once.
It is important to have your agent calculate the market’s absorption rate right at the time you are ready to put your home on the market.
If we could stop any more listings from coming onto the market in that specific set of parameters, it would take 6.9 months to sell the listings in Anoka County, given the current rate of purchases made by Buyers.
I find it interesting how the absorption rate can vary, based on different sets of home criteria. For example, today in Lino Lakes, using the criteria of ALL Two Story Style Homes in Lino Lakes MN, the absorption rate is 6.6 months. However, when the criteria is changed to be two Story Style Homes in Lino Lakes, MN with 3000+ finished square feet, the absorption rate is just 4.33.
This isn’t so surprising because it reflects the idea that buyers are purchasing the best values on the market and square footage is one measure of a home’s value.
Using this absorption rate, and how it varies with changed in criteria, really helps illustrate where Buyers are Buying. Data showing which style of homes, neighborhood, or ages of homes buyers seem to prefer is priceless information for Sellers competing in this marketplace.
Thinking about selling your home?
Sarah can calculate the current absorption rate for your home, just send an email with your Home’s Address, Style, Year Built, bedrooms, bathrooms, garage, Square Footage and lot size and she will run some absorption rate comparisons for you! We are always happy to help.
Home sellers may also want to find a REALTOR with the following designations and/or certifications:
Seller Representative Specialist SRS Designation
CRS Designation= Certified Residential Specialist
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