Absorption Rate
Definition of "Absorption rate"
The real estate market uses the absorption rate to assess at which rate are available homes sold. This evaluation method is used for specific markets for specific periods of time. To calculate the absorption rate, the number of homes sold during that time is divided by the number of homes available. Through this calculation, it can be identified how fast homes are sold in any area during any period of time. The equation can be reversed to determine how long a house is expected to wait on the market before it is sold.
What is Absorption Rate in Real Estate?
As mentioned above, analyzing the absorption rate can give insight into how fast houses are sold in an area during a period of time. When the absorption rate is analyzed, new homes for sale that enter the market are not considered based on the data available at that time.
The absorption rate can also help market analysts to understand whether they are dealing with a seller’s market or a buyer’s market. If the absorption rate is high, typically above 20%, that means that homes sell fast and that the demand will shrink rapidly. This also means that the real estate market leans towards becoming a seller’s market. However, when the absorption rate is low, usually below 15%, homes don’t sell as fast and might saturate the market into becoming a buyer’s market.
How does the Absorption Rate affect the Real Estate Market?
The sale price is one of the most important effects of the absorption rate on the real estate market. When the market is thriving and homes are sold in no time, then a real estate agent can increase a listing price. When demand is high, prices can rise to take advantage of it. The opposite can happen if the market is struggling. Prices can drop as demand is low.
The absorption rate can also help buyers and sellers decide when it’s best to buy or sell a property. Naturally, a seller’s market with a high absorption rate tells owners to sell as prices are growing, and similarly, a buyer’s market with a low absorption rate tells investors to buy as prices are dropping.
For developers, the absorption rate can signal a need for new housing as demand increases in an area or lack of demand and a drop in construction.
Popular Real Estate Terms
Statue designed to protect lenders if a seller secretly sells substantially all of the business property. The objective of the law is to safeguard against defrauding creditors. ...
Within Real Estate, “nuisance” is a term used to describe any disturbance that might affect neighboring houses. Nuisance abatement is the enforcing of policies and codes that ...
Method of selling and obtains possession, but the seller retains the title. ...
Inspection required in certain types of sales of property to determine if termites are present within a building. ...
A roof having two slopes on each side. The second slope is longer than the first part of the roof and extremely steep. ...
Contract that intends to convey property form one individual to another but is defective in one respect. ...
Section of the Internal Revenue Code that addresses tax-free exchanges of certain property. The general provisions for a tax-free exchange of real estate are that the properties must be ...
Rental agreement directly between the landlord and tenant. If the tenant then rents it out to another, it is referred to as a sublease. The relationship takes the following form: ...
In order to define the rate of return on investment, or more commonly known as ROI we are also going to explain how it can be calculated and what to look for in the return rate. Investing ...
Have a question or comment?
We're here to help.