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
Type of flooring, made up of tiles of colored stone or marble that is set in concrete. ...
Right to an item belongs to the public at large so anyone can use it. An example is a real estate software program that is publicly available by an electronic bulletin board service. ...
A natural process of adding soil to land, usually by water action, leaving earth or sand deposits. This can take place through unusual events such as flooding or storm conditions, or ...
A step's edge. ...
Early American frontier-style house constructed of logs. Since finished lumber was not readily available during the early frontier period of American history, homes were often fashioned out ...
A knowledgeable person authorized to aid in the underwriting of property and casualty insurance. ...
Lessors of real estate play a crucial role in the leasing process. They enable property owners to boost their assets and profits while providing tenants access to dwelling spaces and ...
A way to sell and finance property by which the seller keeps title but the buyer takes possession while installment payments are being made. The gain is taxed while the mortgage ...
Highest bid to buy and the lowest offer to sell a parcel of real estate in a particular market at a specified time. ...
Have a question or comment?
We're here to help.