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Absorption Rates - What They Are and Why They Are Important
By Ryan Ward | December 13, 2007
Part of what we must do as real estate professionals is parse through enormous amounts of data and find pertinent information as it relates to the past, current and future market conditions. One of the very most important statistics for us as professionals is what we call absorption rates. At the their core, absorption rates give us a picture of the market by putting into perspective inventory levels and the rates at which homes are selling. We can use the absorption rate to gauge a quick snapshot of the housing market. The definition of an absorption report is:
The length of time it would take to sell all homes currently for sale in the market based on the currnet rate homes are selling.
Usually, absorption rates are given based on the sales for the month. Her’s an example:
- There are 1,000 homes for sale.
- Last month 100 homes sold.
- Based on 100 homes selling a month, it will take 10 months for all homes to sell.
- This means the market has an absorption rate of 10 months.
I would say however, that using only the last month for data is not the best approach as sales can tend to change too much month to month so I would recommend that the absorption rate be determined by using the last 3 months of sales and dividing by 3 to get a better average of home sale.
Absorption rates are very scalable and can be used for a neighborhood, city, state, nationally and beyond and it is not necessary to use monthly sales to determine the absorption rate. If you wanted to look at absorption rates for the last 50 years, using absorption rates with yearly sales would be perfectly acceptable and accurate enough for that scale and in most circumstances.
Why You Need to Know the Absorption Rate as a Buyer or Seller
As a seller, the absorption rate is one of the most important gauges that can help you understand supply and demand for the market. If the absorption rate is high, it means that you will be competing against more homes for sale and/or homes are not selling very quickly. By looking at absorptions rates for the last few months, you can develop trends. if the absorption rate is getting longer, you are heading into a buyers market and conversely, if the absorption rates are becoming lower, the trend is that homes are selling more quickly.
At the end of the day, the absorption rate is one of the best indicators of where the market is and which direction the market is heading. As a buyer or seller, knowing which direction the market is heading is fundamental in determining a homes value. If prices are heading down and you are a buyer, you do not want to pay the amount a house sold for last month. you want to pay less because the value will likely be lower in months to come. If you are a seller and prices are heading up at say, 5%, at it takes on average 3 months to sell, you will want to price your home at what homes will be worth in three months. Both of these are called anticipated price and the absorption rates help determine that value.
To summarize, absorption rates are determine by looking at the number of available homes divided by the number of homes selling at the current rate of sales. if you have any additional questions about the real state market, please feel free to contact me.
Ryan Ward
404.630.3187
Atlanta Real Estate
Topics: Atlanta Real Estate |
December 14th, 2007 at 12:22 pm
Ryan - Excellent information for your clients as well as future prospects. Absorbtion rates are a key statistic for people to understand as they really influence home prices going forward.
December 16th, 2007 at 11:51 pm
Great explanation on the value of absorption rates. I am looking forward to absorption rates declining in 2008.
March 18th, 2008 at 12:16 pm
Ryan, great post on the importance of absorption rates. I use this calculation in every single listing presentation I do, and have posted on the topic several times myself. It’s one of the purest methods of guaging the health of a real estate market.
March 19th, 2008 at 4:34 pm
[…] the absorption rate for similar homes. Here is a detailed explanation of absorption rates. For absorption rates, I recommend illustrating it using 3 months, 6 months and for the past year. […]
March 27th, 2008 at 12:08 pm
[…] The absorption rate looks at the number of currently available homes divided by the number of sales in a month. This yields an average to see how long it would take to sell all homes currently available. You can read more about absorption rates here. […]