The absorption rate provides insight into the real estate market letting us know the rate at which homes sell in an area over a period of time. In most cases, an absorption rate above 20% is associated with a seller’s market and an absorption rate below 15% is an indicator of a buyer’s market. Typically, you would calculate the supply over a specific period to access these sales trends.
Why are absorption rates important? Real Estate Professionals will consider the absorption rate when determining a listing price. If the absorption rate has increased, this means that there is a good demand and smaller supply. If the absorption rate has slowed then that means the supply is great, and the competition is higher, therefore, this may justify a decrease in the property price.
“Buyers and sellers today should pay attention to the absorption rate for their area and price range. The absorption rates are at historic lows but some price ranges will see a slight uptick in their numbers. We as a company review the overall numbers but also take a deep dive into every price range. This helps our clients better understand the market they are in.”- Tom Horner, B&C Managing Broker
How to Calculate an Absorption Rate:
Step one: Pull data from MLS to see how many homes closed in your area over a specific time period.
Step two: Divide the number of homes by the number of months in the period
Step three: Now, divide the rate into the number of current listings. This will give you the months’ supply of homes.
When supply and demand is roughly equal for six months, that is considered a balanced market. And, as stated above, the numbers over 20% represents a sellers’ market and if the rate is below 15% it is considered a buyer’s market.
Based on the absorption rates below, we can see that we are currently in a seller’s market.