Absorption Rate is a metric used by some real estate professionals to measure a market’s internal supply and demand. It basically utilizes the current inventory of homes (supply) and recent sales history (demand) to calculate the market’s current sales rate.
For example if a market has 1,000 current listings and a sales history of 2,000 homes per year, the annual absorption rate would be 1,000/2,000 = 0.5. Thus our example market has an inventory absorption rate of 50%. A percentage below 50% means more homes are being sold than listed (supply is decreasing). A percentage above 50% means that more homes are being listed than sold (supply is expanding). A 50% absorption rate indicates a 6 month supply of inventory and this is characterized as a balanced or transitional market.
The Absorption Rate is the ability of the real estate market to absorb or sell all of the houses for sale in a given amount of time. For example, if 100 homes are sold every month and there are 1200 homes for sale, it will take 12 months to sell all of the homes currently for sale. If there are 2400 homes for sale, the absorption rate will be 24 months or 2 years for all of the homes to sell, this does not take into count the number of houses which will eventually come on the market in addition to those already for sale.
If you would like to sell in 12 months, you need to take the absorption rate into account. In the above scenario with 2400 homes for sale, we know that only 1/2 of them will sell in the next 12 months. If you need to sell within the next 12 months you need to price the property in the lower 50% of the price range for similar properties in order for it to sell in the next 12 months. To sell in the next 6 months it would have to be priced in the lower 25% of the competition.
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