Real Estate Term of the Day: Absorption Rate
ABSORPTION RATE – the rate at which homes are selling in a specific area.
There are 3 pieces of information you will need to find absorption rate:
- The specific time frame
- The number of sold homes during that time frame
- The number of active homes right now
Here is how I calculated the absorption rate for the entire Metro Denver area based on the October 2011 Residential/Condo Town Homes Market Data (provided by Metrolist):
- 1. Time Frame = 304 days (total days from January 1, 2011 to October 31, 2011)
- 2. Number of Sold Homes = 33,163 (from January 1, 2011 to October 31, 2011)
- 3. Number of Active Homes = 14,156 (at the end of October 31, 2011)
- Rate of Home Sales = .00917 – 1 home is sold every .00917 days. This number is found by taking 304/33,163 (Time Frame/Number of Sold Homes)
- Absorption Rate = 4.32 Months. Found by taking 14,156 x .00917 (Number of Active Homes x Rate of Home Sales/30 days)
What does this tell us?
If market conditions do not change and if no new listings come on the market it will take 4.32 months for the current inventory to sell at the current pace of the market. A balanced market’s absorption rate is typically between 5 – 7 months. An absorption rate lower than 5 months is more favorable to sellers. Whereas, an absorption rate higher than 7 months is more favorable to buyers.