Absorption Rates
More and more real estate agents are using the term absorption rate when it comes to talking about the market. In some areas looking at the absorption rate and seeing how many months of inventory is available can be a little daunting. You have to remember that absorption rates are really only helpful to track trends of a local housing market. Understanding local trends and utilizing absorption rates is part of my job as a real estate professional. Remember that the absorption rate is not an exact science and used only to look for the trend in a particular real estate market area. I figure the absorption rate monthly so that I can take that look.
So what is an absorption rate? It’s the mathematical representation of the relationship between supply and demand. The total quantity of available homes is divided by total homes sold in the previous month. The results represents the number of months it will take, at that same pace, to sell the entire real estate inventory of a local market area.
Here is the a fictitious example:
- Kitsap County has 989 homes currently on the market.
- Last month, 92 homes sold
- 989 / 92 = 10.75
- So the Kitsap County area has 10.75 months of inventory.
But, remember that is only true if the market stays the same.
Absorption rates allow us to give some kind of mathematical equation to determine what type of real estate market we are experiencing at any given time. Remember that real estate is local and that towns, cities, counties and states all have different absorption rates and will have different markets. There are also different markets within a market. You might have a buyer’s market when you look at high end homes and yet a seller’s market when it come to 1st time home buyer properties.
- NORMAL MARKET :: conditions exist when the Absorption Rate is between 5 and 6 months
- SELLER’S MARKET :: conditions exist when the Absorption Rate is lower. (1 - 4 months)
- BUYER’S MARKET :: conditions exist when the Absorption Rate is higher. ( 7 plus months)
