The term 'Absorption Rate' is included in the Real Estate edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
Absorption rate is a term used in real estate. It represents the speed with which homes available in a real estate market are sold in a certain amount of time. Real estate professionals figure out this absorption rate by taking the number of houses that are available and dividing this by the average number of sales in a month. The result provides a useful number. It is the total number of months it will require before all of the homes on the market are sold.
It is important to note that this absorption rate does not consider any supplies of other houses that enter the real estate market. As such it is a snapshot of a fixed moment in time. Higher absorption rates will usually signify that the numbers of available houses will decrease quickly. This means that a homeowner would likely sell his or her house in a shorter time frame.
In historical context, when the rates of absorption rose over 20%, this has meant that the market was ideal for sellers. Homes would sell fast. When the absorption rate proved to be lower than 15%, this means that a buyer’s market is in effect. Buyers are being pickier. This slows down the rate at which homes are being sold.
The absorption rate is easier to understand by looking at an example. In this scenario, a given city has 2,000 houses that are up for sale. If buyers came into the market and bought up 200 homes each month, then the home supply would be depleted in 10 months. This is simply figured by dividing the 2,000 houses by 200 homes bought each month.
When buyers purchase the 200 houses from the 2,000 houses total, it means the rate of absorption equals 10%. This number is derived by taking the 200 houses buyers purchase every month and dividing it by the total 2,000 houses for sale. It would mean that the market is optimal for buyers. Any homeowner who was hoping to sell a house would be aware that the market should half sell out over a period of five months.
There are a number of different individuals who work with this important figure. Real estate industry professionals are most interested in the number. Real estate brokers would put this number to use when they price houses. If a market showed signs of lower rates of absorption, the agents might have no choice but to lower the listing price in order to attract a buyer. In the opposite case, the market might exhibit a higher rate. This would allow the realtor to raise the home price without eliminating demand on the property.
Home builders also look at these absorption rates when they are thinking about building new properties. A higher rate is often interpreted by the construction industry as an optimal time to begin building new houses. When the conditions on the market show higher absorption, it means demand can likely support them developing additional properties. The opposite is true if there is less absorption. This tells them that demand is lower. Construction may pause in efforts to build new houses.
A last group that carefully studies the rates of absorption are the property appraisers. They think about these rates when they are considering the total value of a given property. In 2009, new appraisal rules came into effect. These mandated that every home value appraisal connected with a home loan had to take into account the active rate of absorption. The reasoning behind this was that home values should be less in times where lower absorption resulted in fewer and more drawn out sales at lower prices.