The Importance Of Market Absorption In Real Estate

By
Real Estate Agent with RE/MAX Realty Group
http://actvra.in/4NjV

Market Absorption Rate in Real Estate

In real estate there are always numbers and statistics being thrown around.  A few of the most popular include:

  • Average days on the market
  • Average list price to sale price ratio
  • Average sale price
  • Median sale price
  • Total number of homes sold

While the above five statistics and numbers are important, one that is frequently forgotten or not discussed is market absorption rate.  Market absorption rates in real estate are very important and for a number of reasons.  

What is a market absorption rate in real estate? Read on to find out and also a few examples of why it's very important!

Defining Market Absorption Rate

According to Investopedia.com, market absorption rate is defined as "The rate at which available homes are sold in a specific real estate market during a given time period."

How Is Market Absorption Rate Calculated

Even though many homeowners don't care to know how market absorption rate is calculated, it is a very simple formula.  Market absorption rates can be calculated by taking the number of available homes by the number of sales in a specific time frame.

For example, if there were 100 homes currently available for sale in the Rochester real estate market and during December there 25 homes sold in the past 30 days, the market absorption rate for the Rochester real estate market would be 4. 

This number indicates the amount of time in months that it would take to sell all of the remaining homes for sale in the Rochester real estate market if no other homes were listed for sale.  

Why Is The Market Absorption Rate Important In Real Estate?

There are actually several reasons why market absorption rate is important for buyers and sellers.  Below are some of the many reasons why they should be aware of the current market absorption rates in their local real estate markets.

Reasons Why Market Absorption Is Important For Sellers

The biggest reason why the market absorption rate is important for sellers is because it can be a tell-tale sign of the current state of the real estate market.  There are three types of real estate markets; a balanced market, a buyers market, and a sellers market.

A market absorption rate can tell a seller what the state of their local market is currently.  If a neighborhood is experiencing a market absorption rate of 7 or 8, it means there are lots of homes for sale in the area likely meaning it is currently a buyers market.  If this is the case, buyers have lots of options to choose from when it comes to looking at homes. 

Every market is different, however, when absorption rates are less than 4 or 5 in most markets indicates a sellers market.  When absorption rates are between 6 and 7 it generally indicates a balanced market and finally, greater than 7 indicates a sellers market.

A seller who knows what the current state of their local market can make an educated decision whether now would be a good time to sell or not.  If a seller is on the fence about selling and the absorption rate is 7 or greater and has the ability to wait to sell, they may want to since it is a buyers market which may mean their home may sell for less.

Reasons Why Market Absorption Is Important For Buyers

The market absorption rate is also important for home buyers.  The majority of home buyers have no clue what an absorption rate is and why it is important to them.  

The biggest reason why market absorption rate is important for buyers is because it can be a great indicator on how much to offer for a home.  If a market is experiencing a low absorption rate of 2.5, a buyer needs to understand that they will likely not be able to submit low ball offers and get their accepted.

The market absorption rate can also help a buyer identify if they will likely have competition or not with their offer.  In a strong sellers market the chances of multiple offers increases greatly.  If a buyer wants to look for their home with no pressure and at their leisure, buying a home when there are low market absorption rates may not be a good choice.

Parting Shots

Both buyers and sellers should be aware of the market absorption rates in their local real estate markets.  Since the market absorption rate can be such a helpful statistic, having an understanding about what an absorption rate is critical.  

 

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Rainmaker
1,289,151
Marte Cliff
Marte Cliff Copywriting - Priest River, ID
your real estate writer

Good explanation, and having a benchmark number is far better than telling people that "there aren't many homes for sale" or "we have an abundance of homes for sale." If you point out that 6 is a balanced market and our current number is 3 (or 9), it means something. 

Jan 26, 2016 01:01 PM #4
Rainer
137,623
Shawn Krill
Realty Executive Premier - Peoria, AZ
Shawn Krill, CPA

Good article.  I have been discussing absorpton rates with my clients for years.  My talks usually go in one ear out the other until I show them graphs of what I am talking about and then bam they get it.

Jan 26, 2016 07:56 PM #5
Rainmaker
37,503
Kyle Hiscock
RE/MAX Realty Group - Rochester, NY
Licensed Real Estate Salesperson, Realtor®, e-PRO®

Shawn Krill  - Thanks!  Graphics make a huge difference with both sellers and buyers.  It makes it really easy to understand!

Marte Cliff - Appreciate the compliments!  Benchmarks are definitely a starting point but it's really important to analyze each area and price point in detail when looking at absorption rates. 

Jeff Dowler CRS - Thank you Jeff.  Agreed, varying price points is an important factor to look at.  I typically will look at a +/- 10% range from where I believe a property should be listed at/sold for. 

Sher Wenowitz - Appreciate it Sher.  Competitive pricing is the name of the game and market absorption rates can help improve the chances you price it right from the start for sure! 

JC Silvey - Thanks for the compliments JC!  It is a huge disservice if we aren't bringing this figure to the table since it can impact both buyers and sellers pretty significantly! 

Jan 26, 2016 10:55 PM #6
Rainmaker
42,820
JC Silvey
Leesburg, VA
Realtor / Certified Appraiser

Hi Kyle.  Just make sure you are using the right terminology.  Absorption rate is important  because it will help you calculate "months of supply" and that is actually what you are talking about in your blog.  An absorption rate of 7 or higher doesn't always indicate a buyers market.  For instance... if the absorption rate is 7 but there are only 5 homes on the market, then that indicates low supply and a market that favors sellers.   "Months of Supply" will determine if you are in a buyers, sellers, or balanced market.  Not absorption rate alone.  

Jan 26, 2016 11:12 PM #7
Anonymous
William Krooss-Tadas

If you want to utilize the market absorption rate with a unique enhanced price trend analysis for your perspective clients. If you believe in using statistics and algorithms to help calculate pricing and demand for your clients. You should consider reaching out to your local Weichert Realtors. They'd be happy to have you!

Jan 26, 2016 11:50 PM #8
Rainer
108,993
Clark Cook
1st Choice Realty of Fayetteville, LLC - Fayetteville, NC
Marketing Homes For Sale In Fayetteville NC Area

This is very helpful, Kyle! It's information especially helpful when working with sellers. Excellent job!

Jan 27, 2016 12:30 AM #9
Rainmaker
1,427,402
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

This is a very important number.  and right now ours is 1-2 depending on the community.  Very tight sellers market. 

Jan 27, 2016 12:56 AM #10
Rainmaker
37,503
Kyle Hiscock
RE/MAX Realty Group - Rochester, NY
Licensed Real Estate Salesperson, Realtor®, e-PRO®

Clark Cook - Thank you and I couldn't agree more!

Gene Riemenschneider - Yes it is.  1-2 is EXTREMELY low.  Your sellers must be enjoying multiple offers!

Jan 27, 2016 01:35 AM #11
Rainer
1,705
Maryline Dumel
Agencima - Cushing, QC
Agence immobilière à Marseillan (34340)

Great! It's a good news, really !

Jan 27, 2016 01:41 AM #12
Rainmaker
284,766
M.C. Dwyer
Century 21 Showcase REALTORs - Felton, CA
Santa Cruz Mountains Property Specialist

Excellent topic & follow up comments!

I've been putting graphs in my blogs about months of supply-the graphs help clients understand.

Jan 27, 2016 04:41 AM #13
Rainmaker
1,029,416
Sharon Parisi
United Real Estate Dallas - Dallas, TX
Dallas Homes

This is important information for all readers.  Absorption rates in Dallas neighborhoods range from 1 month to 4 months. Many neighborhoods would benefit from increased listings.

Jan 27, 2016 05:02 AM #14
Ambassador
1,542,776
Karen Fiddler, Broker/Owner
Karen Parsons-Fiddler, Broker 949-510-2395 - Mission Viejo, CA
Orange County & Lake Arrowhead, CA (949)510-2395

What a great tutorial on this subject. I think many people will enjoy this. 

Jan 27, 2016 07:11 AM #15
Rainmaker
37,503
Kyle Hiscock
RE/MAX Realty Group - Rochester, NY
Licensed Real Estate Salesperson, Realtor®, e-PRO®

Karen Fiddler, Broker/Owner , M.C. Dwyer , & Sharon Parisi - thank you for the compliments and I agree, this is information that buyers and sellers should both be aware of!

Jan 27, 2016 11:44 AM #16
Rainmaker
1,277,438
Georgie Hunter R(S) 58089
Hawai'i Life Real Estate Brokers - Haiku, HI
Maui Real Estate sales and lifestyle info

Good explanation of how it varies whether you're a buyer or seller. Either way it's something to pay attention to.

Jan 27, 2016 04:46 PM #17
Rainmaker
37,503
Kyle Hiscock
RE/MAX Realty Group - Rochester, NY
Licensed Real Estate Salesperson, Realtor®, e-PRO®

Thank you Georgie Hunter R(S) and I agree it absolutely matters for both!

Jan 27, 2016 10:27 PM #18
Rainmaker
197,954
Liane Thomas - Corona & Riverside Real Estate
BROKER Allison James Estates & Homes BRE 01885684 - Corona, CA
Bringing you Home!

Basic rule of economics is supply vs demand, AKA absorbtion rate.

Thank you for the gentle reminder to share this info at the beginning to set realistic expectations.

Feb 08, 2016 01:11 AM #19
Rainmaker
37,503
Kyle Hiscock
RE/MAX Realty Group - Rochester, NY
Licensed Real Estate Salesperson, Realtor®, e-PRO®

Liane Thomas - Corona & Riverside Real Estate - You're welcome.  Many forget that absorption rate is pretty simple actually and also that it is important!

Feb 09, 2016 01:23 AM #20
Rainmaker
839,968
Ann Hayden
Berkshire Hathaway HomeServices Select Properties-St. Louis Missouri - Chesterfield, MO
SelectAnn.com

Kyle Hiscock ,

Realistic expectations are a plus when buying or selling.

Great blog!

Ann Hayden in snowy Town and Country MO

Feb 11, 2016 11:54 PM #21
Rainmaker
37,503
Kyle Hiscock
RE/MAX Realty Group - Rochester, NY
Licensed Real Estate Salesperson, Realtor®, e-PRO®

Thanks Ann Hayden for reading and the compliments!

Feb 12, 2016 01:38 AM #22
Ambassador
1,630,079
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

It seems confusing:

"If a neighborhood is experiencing a market absorption rate of 7 or 8, it means there are lots of homes for sale in the area likely meaning it is currently a buyers market." So, if greater than 7, then it is Buyers' market...

And then few sentences down you write:

"When absorption rates are between 6 and 7 it generally indicates a balanced market and finally, greater than 7 indicates a sellers market."

How can the market at absorption rate greater than 7 be Buyers market in one case, and sellers market in the other?

Mar 20, 2016 01:43 PM #23
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