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.
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.