What is absorption rate?
The absorption rate is the rate at which houses are sold in a particular market at a give time. This rate depends on the time frame, number of houses sold during that timeframe, and finally, the total number houses available for sale.
How to calculate the absorption rate?
To calculate the absorption rate, one will need to know the number of properties listed for sale and those that have been sold in a given time.
Once you have these two numbers, you will then divide the number of properties sold over the total number of listed properties.
Example of absorption rate
Let’s assume that you want to sell your house. But, before you do, it is important for you to know the type of market you are in. So, you did your homework and realized that there 30,000 homes listed for sale at the end of the month. At the same time, 3,000 homes have been sold over the last month.
Your main goal is to know how long it will take you to sell your house.
By using the formula shown above, you decided to calculate the absorption rate.
Absorption rate = 3,000/30,000 = 1/5 = 0.1 or 10%.
What does this number tell you? This number will not do you any good if you do not understand what it means.
Among the 30,000 homes listed for sale, 10% were sold last month. If all these homes were to be sold, it would take 10 months to sell all of them. In order words, it will take you around 10 months to sell your house.
This information is very crucial because it can help you know the kind of market you are in and how long it will take you to sell your house. In addition, you can use this information for pricing and bargaining.
Why is the absorption rate important?
The absorption rate is important as it can tell you if you are in a buyer’s market or a seller’s market. According to Investopedia, an absorption rate under 15% shows a buyer’s market whereas an absorption rate greater than 20% indicates a seller’s market.
A buyer’s market means that there is more supply than demand. In order words, the real estate inventory available is much more than buyers available to consume it. As a result, sellers will compete in order to get their houses sold. This competition among sellers will drive prices down and properties will stay on the market for a long time. This is a good time to buy a house.
At the same time, if there were 30,000 in a city and 10,000 homes were sold, the rate will be 33%. This rate indicates a seller’s market. In order words, it will take you around 3 months to sell your house.
During a seller’s market, there are more buyers than sellers. Sellers will have an upper hand over buyers because the inventory available cannot satisfy the number of buyers. The competition among buyers will push prices much higher. This is the right time to sell a house.
