Pricing Realistically - Understanding Absorption Rate in Real Estate
Housing economists and experts use the absorption rate in real estate to predict the housing market, while sellers may heard the phrase through the media but really don’t know what absorption rate represents. Since April 2009, appraisers are required to use absorption rate for all government loans.
Absorption rate is an assessment of the current housing inventory, including properties under contract (pending) because a prospective buyer can walk at any time, divided by current rate of sales, expressed in months of supply. In any local real estate market, the absorption rate is generally considered the best indicator of whether the housing is either a seller’s or a buyer’s market.
- Normal Market - Absorption Rate is between 5 and 6 months.
- Sellers Market - Absorption Rate is lower (1-4 months)
- Buyers Market - Absorption Rate is higher (7+ months)
To simply define absorption rate in real estate, it is the number of months it will take to sell all homes for sale. For example a 12 months supply would mean that at the current rate of sales and no additional homes coming on the market, it would take 12 months for the inventory to deplete.
Just like in any industry, supply and demand play an important role. If the demand is slow coupled with increasing supply will give you lower prices that results in a buyer’s market. Likewise, if supply is limited, home buyers will typically pay more for the home - seller’s market.
When it comes to calculating the absorption rate in real estate, it really brings the housing market for sellers and buyers into perspective. For sellers, it will define the market in how to price the home realistically when comparing their competition with the result of a faster sale. For the buyer, the absorption rate can provide a negotiation tool to obtain a lower price.
In reality, there is only a certain number of homes that will sell in any given period. While absorption rate is not an exact science, the key to you selling or buying a home is understanding the local real estate market and trend providing you with a clear vision when it comes to making an informed decision.
Copyright © 2010 By Petra Norris * Pricing Realistically - Understanding Absorption Rate in Real Estate*