Absorption Rate – What Does That Mean?
In this post we will do a some education about some of the metrics we use to gauge the health of a particular market. Thanks to Investopedia, we have this nice defintion for us:
The absorption rate is the rate at which available homes are sold in a specific real estate market during a given time period. It is calculated by dividing the average number of sales per month by the total number of available homes.
In any market, this tells us the rate in which homes are sold and how many months it would take to consume the inventory of homes if no other homes came on the market.
In a scale of 12 months, an absorption rate of 5-6 is considered a balanced market – neither the buyer or the seller is favored. If the rate is less than 5, then the market favors the seller. Over 6, then the market favors the buyer.
In our part of the country, we track the absorption rate by the school district because that is how consumers shop for homes here. It is not unusual to have different absorption rates for different school districts – even if they are adjacent to one another. Currently (Nov. 2017) we are seeing absorption rates between 3.4 and 7.5). This is indicative of a strong selling market with pricing favoring the seller.
Why is the absorption rate important to you and how can you use this information? It is important as a buyer to know that the market for your offer may be competitive. Your offer should not start at a discount to the price that is not realistic for the market you’re in. Or, you may look for homes that have not sold quickly that have been priced incorrectly and did not sell. Offers on those homes may not be as competitive.
If you are selling and the absorption rate favors the seller, it still means that your home needs to show well and be priced correctly. Your advantage is that your home may sell quicker and closer to your asking price. Be prepared if you are selling your home and have not determined which you will be buying. Your advantage as a seller is a disadvantage as a buyer. This a contributing factor for our current inventory shortage (a topic for a later blog).
Talk to your Realtor about the absorption rate. It is an important dynamic in the home buying and selling process.
Vince
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