Every once in a while I am asked the question, “What is the real estate ‘absorption’ rate, Myrl?” It doesn’t come up often, but I hear it often enough that I have the explanation in my head to provide the answer.
Sometimes the question is asked by folks interested in buying or selling real estate; or for those simply interested in current market condition. The answer is “the real estate absorption rate” is used to help predict the housing market.
The general public sometimes hears the label used via the media, but they don’t often have the data to translate it into meaningful information. The real estate absorption rate helps the public more accurately determine whether it is a buyer’s or seller’s housing market.
In a “Normal Market” the absorption rate is between 5 and 6 months. In a “Buyer’s Market” the absorption rate is higher (7+ months). But in a “Seller’s Market” the absorption rate is lower (1-4 months).
A clearer definition of real estate absorption rate is to ascertain the number of months it will take to sell all homes currently on the market. If the inventory of homes presently on the market is a 12 month supply, it would mean at the current rate of sales, the market would need 12 months to clear the inventory, IF no additional homes came on to the market.
Being aware of the real estate absorption rate, assists in creating perspective for homebuyers and sellers. It educates sellers so they can have realistic expectations about pricing their home for the market. By being competitive in price, they improve their odds of having their home sell quickly. Sometimes while making offers on homes, buyers will use the absorption rate to obtain a lower price during negotiation.
It should be remembered however, that outside influences may dramatically affect the predictability of real estate absorption rate. For example, government policies and programs can either stimulate or wither the marketplace. An improved job market would have a significantly positive effect on the economy, which could spur buying and quickly clear out housing inventory and change the absorption rate picture.
It is important that serious homebuyers and sellers understand their local real estate market, and trends for their area, in order to make informed decisions regarding their real estate needs.
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