Absorption Rate …..
Market absorption rate in real estate is often a term that buyers & sellers don’t understand. Let’s start with a simple definition of absorption rate in real estate and then I’ll make it a bit more interesting. Quite simply, absorption rate is the number of months it would take to sell the currently listed homes that are on the market. It really is as simple as it sounds, and the math is for the most part too. However, it’s a very important concept, and is used by most professional Realtors® to attempt to predict home prices and sales activity going forward.
If you’ll be buying or selling a home, make sure you read on to find out what market absorption is, how it’s calculated, and the potential affects it can have on your real estate transaction.
How Is Market Absorption Calculated?
Most of those who use absorption rate use six months of home sales as their baseline. Let’s use a fictional example to illustrate how absorption rate is calculated:
1. In the City of Taunton, for the first six months of this year there were 197 single family homes sold.
2. So, 197 homes divided by 6 months yields 32 homes sold per month.
3. There are currently 79 single family homes listed for sale in this market. We divide this number by 32, and we find that there is currently a 2.47 month supply of homes for sale in this market. At the current rate, with none withdrawn and none added, it would take 2.47 months to sell them all.
How is this number important to you?
The sponge image helps to illustrate the concept. If you have water leaking into your home and you’re sopping it up with a sponge while you look for a bucket, your sponge is “absorbing” the incoming waters.
The rate at which the sponge can absorb the water is the absorption rate. The sponge represents buyers or closings of sales. The leak is the entry of new listings on the market. If the leak gets bigger but the sponge doesn’t, then we get a lot more water on the floor, or more listings sitting unsold. A bigger sponge will absorb more water, so more buying will keep the leak at bay.
So absorption rate in real estate is the rate at which homes are selling (the sponge) as compared to the number of listings on the market (the leak rate). It’s all about supply and demand, which rules all markets.
In real estate a popular rule of thumb is:
- If the absorption rate is 6 months or more, the market is rather leaky which means it is a buyers market. There are more homes on the market than there are ready, willing and able buyers.
- If the absorption rate is under 6 months, the market is rather absorbed which means it is a sellers market. There are more ready, willing and able buyers than there are homes on the market.
It can be tricky for a buyer to successfully buy a home in a sellers market. A few of the best tips for buying a home in a sellers market include;
- Get pre-approved, not pre-qualified – There is a difference between a mortgage pre-approval and pre-qualification
- Hire a top buyers real estate agent
- Be realistic and flexible
- Be ready to buy
Another potential impact that the market absorption rate can have on a buyer relates to the price they will pay for a home. If a buyer is searching for a home in an area that has a low market absorption rate, the chances they will be in a multiple offer scenario increase which typically will lead to a buyer paying more for a home.
Contact me about Selling or Buying Your Home in Massachusetts
Bobbie Files is a Real Estate agent at SUCCESS Real Estate, covering the Bristol, Plymouth and Norfolk County areas