Absorption Rate

Definition of "Absorption rate"

Written by

Benny Ergas

United Realty Group Inc.

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.