What Absorption Rate Means

All right, friends, let’s talk about absorption rate. The term sounds intimidating, but it really isn’t once you understand what it means.

What is Absorption Rate?

This term is used in the real estate industry to evaluate the rate at which available homes are sold in a specific market during a given time period. It’s a good way to measure demand in a particular market.

How is Absorption Rate Calculated?

Absorption rate is calculated by establishing a set area or neighborhood and determining how many homes sold in that area during a specific time frame. That gives us the rate of home sales. Then, we take the number of current active home listings times the rate we just calculated to determine the length of time it will take to sell a property.

OK, so that was as clear as mud, right? It sounds a lot more complicated than it is, so let me break it down for you.

According to the IRMLS on July 17, 2020, 59 homes have sold in the West Lafayette Community School Corporation in the past 90 days. So, that is 90 days (timeframe) / 59 homes sold = 1.5254 (rate of home sales).

Currently, there are 18 homes active in the IRMLS for the WLCSC. So, 18 homes X 1.5254 = 27.45 days of inventory available.  

What Does Absorption Rate Mean?

This means that if no new inventory came on the market, all the homes on the market in the WLSCS would be sold in 27.45 days, and we would be out of inventory.

Basically, the higher the absorption rate, the faster homes are selling. As you can see, homes in the WLCSC are currently selling incredibly fast and there isn’t nearly enough inventory to keep up with buyer demand.

A six-month supply is considered a balanced market—when the number of listings available roughly equals the number of buyers. Over six months of supply represents a buyer’s market, where buyers will have more leverage with sellers when negotiating.  Less than six months of supply is a seller’s market, when sellers have more leverage during negotiations.

The absorption rate is important for both buyers and sellers because it indicates how long it would take to sell current inventory that’s actively listed based on historical sales data.

How Do Realtors Use Absorption Rate Data?

Now, you might be wondering why the absorption rate is so important to Realtors. We use this number to determine how we’re going to price a home that we’re listing for sale. In a seller’s market, where homes don’t say on the market for very long, we can bump the price up since there’s extra competition and low inventory. Appraisers also factor absorption rates into the equation when they’re determining a home’s true value.

And there you have it! A quick and easy explanation of what absorption rate is and how it can help you know where you stand as a buyer or a seller in a given market.