What is an absorption rate?
Updated April 4, 2023
Absorption rates measure how quickly or slowly homes are sold in a specific market and time frame. It’s important for sellers, buyers and realtors to calculate the absorption rate as it’s used to read market conditions. The higher the absorption rate, the faster homes are selling since there’s more demand from buyers than available properties.
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Formula for absorption rate
You can calculate the absorption rate by taking the number of sales per month and dividing that by the total number of available properties in a specific area.
Let’s say there are 1,000 homes on the market in a particular area and buyers are purchasing 150 properties per month. The absorption rate would be 15% (150 homes sold per month divided by 1,000 homes in the specific market).
An absorption rate below 15% usually indicates a market that favors the buyer, meaning that supply is stronger than demand, and those making offers may be able to get a deal. When absorption rates are lower, competition is lower and inventory lags. On the other hand, an absorption rate above 20% signals a seller’s market, meaning that supply can’t keep up with demand, and homes are likely selling more quickly and at higher prices—favoring the seller. During times when absorption rates are above 20%, houses tend to be higher priced and multiple bids are common, which can also lead to higher-than-asking prices.
How are absorption rates used?
Professionals in the real estate industry use absorption rates for different reasons. Realtors and brokers use it to determine whether the real estate market is a buyer’s or seller’s market. Appraisers use absorption rates to help value a home, as they’re generally responsible for measuring market conditions. Absorption rates are also used by contractors and developers to determine whether there’s demand for new homes in an area. Developers might consider building in a seller’s market, since there would be more of a need for new homes.