Absorption Rate: Measuring And Calculating It For Market Demand

If you’re looking to buy or sell a home in the near future, a real estate term you might come across and make use of during the process is “absorption rate.” The absorption rate is a metric you can use to help you determine two important things: how long a home will be on the market and the price of the home.

In this article, we’ll take a deeper dive into what absorption rate is, how it’s used in real estate and what it means for you as either a home buyer or seller.

What Is Absorption Rate In Real Estate?

Absorption rate is a term used to describe the speed homes are sold in a specific market in a specific time frame. It’s determined by dividing the number of homes sold by the number of available houses within the time frame.

A high absorption rate means there’s a high demand for homes and that homes don’t stay on the market for long. A market with an absorption rate at or above 20% is typically called a seller’s market, whereas an absorption rate below 15% signals a buyer’s market.

Understanding Absorption Rate: A Deeper Explanation

Absorption rate affects the housing market in a variety of ways. With a high absorption rate, sellers know their property is likely to sell quickly due to high demand. High demand can also cause the home value to go up.

On the flipside, in markets with low absorption rates, homes can be on the market for months and buyers will have their pick of properties with little competition from other buyers.

How Professionals Use Absorption Rate

Let’s take a closer look at how a variety of professionals in the real estate industry use absorption rate to make decisions.

• Real estate agents and brokers: To determine the right price for a home, agents, REALTORS^® and brokers use absorption rates to determine if demand is rising or
• Home appraisers: Absorption rates are used by appraisers to show market demand and add validity to their home appraisal
• Contractors and developers: Absorption rates help contractors and developers gauge demand for new homes in an area to determine if they should build there.
• Real estate investors: Those investing in real estate consider absorption rate to know whether it’s a good time to buy or sell.

How To Calculate And Measure Absorption Rate

The formula for absorption rate is simple. You divide the number of homes sold in a time frame by the homes available. How you adjust these variables can have a big impact on the rate.

For instance, if you use all homes in a ZIP code versus the homes in a specific neighborhood with specific features, there can be a big difference.

An Example Of Absorption Rate

Here’s a fictional absorption rate calculation:

1. Total homes sold in past 30 days: 10
2. Total amount of homes on the market: 45
3. 10 / 45 = 0.22 or 22% absorption rate.

This 22% reflects that this market is a slight seller’s market. Traditionally, a percentage of 15% – 20% indicates a neutral market. Above 20% means higher demand and that home prices may rise.

The Relationship Between Absorption Rates And Real Estate Markets

As mentioned above, an absorption rate quantifies whether a home is in a buyer’s or seller’s market. With a seller’s market, the market is often described as “hot” – homes aren’t staying on the market for long, leading to a high absorption rate. This high rate leads sellers to raise their prices. Still, if demand is high enough, bidding wars can happen.

In a market with a low absorption rate, sellers may have to lower their home price to attract buyers. This could lead to sellers accepting below market value for their home because the market in the area has slowed and they need to sell.

The Importance Of Absorption Rates

Absorption rates are an important metric for both sellers and buyers. They can indicate how long the home will be on the market by comparing it to the rate which comparable homes are selling.

It also can play into the price of the home. A home in a market with a high absorption rate will command a higher price than the same home in a market with a low absorption rate.

The Bottom Line: Absorption Rate Measures How Quickly Houses Are Sold

Put simply, the absorption rate is a measure of supply and demand. By taking the number of homes sold in a month and dividing it by the number on the market, you can find a percentage that determines how quickly homes sell. Rates over 20% indicate a hotter real estate market with rising home demand and home prices.

Absorption rate is just one way real estate professionals gauge housing market conditions. Read this article to learn more about 2024 housing predictions and forecasts.