In real estate, the absorption rate is a measurement that communicates the rate at which the average home has sold over a specific amount of time. It is a formula used to help homebuyers and sellers make informed decisions about the most optimal time to buy or sell their home to receive the greatest value.
Absorption rate formula:
“Homes Sold ÷ Total Homes for Sale = Absorption Rate”
This is the barebones absorption rate formula. The more parameters you add to the formula, the more specific your calculations can be. For example, the formula must be considered within the parameters of a certain time-period. The industry standard is to calculate monthly.
To make the calculations specific to your need, simply exchange the generic terms “Homes sold” for something more specific like “Beachfront homes sold.” The second category will also change to reflect consistent categorization:
“Beachfront Homes Sold ÷ Total Beachfront Homes for Sale = Absorption Rate”
You can choose to be as generic or as specific as you like. Adjust the formula to consider the absorption rate of home prices, foreclosures, specific square footage, and more.
Buyer’s vs Seller’s Market: Understanding the Data
Real estate is a fluctuating industry with doors of opportunities opening and closing every day. Understanding the benefits and drawbacks of certain real estate seasons can help you buy a home at the lowest cost or sell it for the highest return.
The absorption rate helps us understand who has the advantage: the person selling or buying the home. Essentially, a buyer’s market means the favor is on the person buying a home because the local industry is not very competitive, which means the homebuyer can usually bid lower and still get the consideration of the home seller.
A seller’s market favors the home seller: there is more competition for their property, which means they may have more bids from which to choose and don’t have to consider low bids.
20% and above tends to be considered a seller’s market. 15% or below tends to be a buyer’s market. 15%-20% doesn’t consistently fall to one person or another’s advantage.
Apply the Data
Knowing how to calculate an absorption rate doesn’t mean anything unless you know how to interpret the data toward your advantage.
To be strategic about homebuying or selling, don’t limit yourself to current market data. Look at the annual housing trends of previous years. You might notice that certain months are consistently seller or buyer markets, and that trend can inform how you choose to navigate the current housing market.
Most important of all, consult a real estate specialist. Understanding the absorption rate is one small way to make a more informed real estate decision but should not be seen as a magical formula for earning a fortune or striking the bargain of a lifetime. Navigating the real estate market successfully requires a lot more. The right agent will help you achieve your real estate goals.