Absorption Rate in real estate investing scenario is the rate at which available properties are sold in a given time phase. It is calculated by dividing the number of properties sold in a given time, by the total number of available properties.
A term commonly used in real estate, Absorption Rate, refers to the rate at which available properties are sold over a given time period.
By dividing the number of properties sold by the total number of available properties, you can calculate whether it is a seller’s market or a buyer’s market.
Typically, an absorption rate of 20% or more is considered a seller’s market and a rate of 15% or less is considered a buyer’s market.
When supply exceeds demand, the number of available properties for sale is greater than the number of buyers. A buyer’s market is the ideal time for a purchaser to consider buying into real estate. Typically, buyer’s in this market are able to buy at a lower cost and negotiate in their favor.
On the opposing side is the seller’s market. This is where the market demand exceeds supply. With an abundance of buyers looking to purchase, but a limited amount of real estate, it is the ideal time for a seller to list their property. Homes will typically be sold at a higher price, get multiple offers, and sell much faster in comparison to a buyer’s market.
As stated, >20% is a seller’s market and <15% is a buyer’s market. However, there’s a bit more that this rate can tell you.
As an example:
In a given market, if there are 400 properties listed and there’s been an average of 10 homes sold each month, the formula would look like this:
10 (avg homes sold a month) / 400 (properties available) = 2.5%
In this situation the market is considered a buyer’s market as it would take 40 months for all available properties to sell. This is calculated by dividing 100% by the absorption rate.
100% / 2.5% = 40
As a buyer or a seller, it is necessary to know what to expect in the current market. The absorption rate helps to indicate to either party how long it would take to sell based on historical sales in the given time period.
For a seller, this helps them consider the right time to list their property. If the market is currently in a “buyer’s market,” the seller can consider if the need to list their property outweighs the opportunity to wait until the market changes.
For a buyer, understanding the current market allows them to make the opportune decision on when to search for and make an offer on a listed property. Waiting until the market is a “buyer’s market” allows them more pricing power in their offers.
Simply put, the absorption rate is a way to measure the supply and demand of the current market in a given area. By using the absorption rate formula (above), real estate professionals are able to analyze current market conditions to make the best decision for their needs.