When people talk about real estate, the first question I often get is, “How is the market?” The answer to that question depends on who is asking it and why they ask. Are they considering selling or buying? Do they own investment properties, or are they seeking to flip or hold investment properties?
The easiest way to evaluate the market is to consider Absorption Rate. What is that? The absorption rate is the rate at which available homes are sold in a specific real estate market during a given period of time. It is calculated by dividing the total number of available homes for sale by the average number of sales per month. The result is the number of months it will take to deplete the supply of homes on the market.
Inventory / # Sales per month = How many months it will take for total inventory to sell
A balanced market absorption rate is typically between 5 to 7 months.
- For sellers, a high absorption rate signifies that the supply of available homes will most likely shrink rapidly, increasing the odds that a homeowner will sell a piece of property in a shorter period of time.
- For buyers, a low absorption rate indicates that the time period it will take for a home to sell is longer, thus price reductions are probably and buyers have the edge in negotiating.
Examples of Absorption Rate:
4.6 months supply of inventory = Seller’s Market
- Translation: It will take 4.6 months for the current inventory to sell at the rate that homes are selling each month, if market conditions do not change and if no new listings are withdrawn or come on the market.
- This is a HIGH absorption rate because houses will sell in a relatively short amount of time.
- Inventory is low and there are more buyers than sellers. Values go up when the supply is less than the demand.
5.5 months supply of inventory = Balanced Market
- Translation: It will take 5.5 months for the current inventory to sell at the rate that homes are selling each month, if market conditions do not change and if no new listings are withdrawn or come on the market.
- This is a NORMAL absorption rate because houses will sell in a relatively normal amount of time.
- There are an equal number of sellers and buyers; prices will be competitive but won’t be driven up, as inventory is sufficient for the market.
7.5 months supply of inventory = Buyer’s Market
- Translation: It will take 7.5 months for the current inventory to sell at the rate that homes are selling each month, if market conditions do not change and if no new listings are withdrawn or come on the market.
- This is a LOW absorption rate because houses will sell in a relatively long amount of time.
- Inventory is high and there are more homes on the market than buyers looking. Values will tend to go down or level off because the supply is more than the demand, and homes sit on the market for longer.
Generally speaking, agents will look back 3-6 months (depending on the area and type of home) to determine the absorption rate. Absorption rate can be determined on a month-to-month basis, as in the monthly market reports I post for northern Palm Beach County.
Real Estate Agents apply the absorption rate in pricing homes.
- If market conditions favor a high absorption rate, it is possible to increase the price of the home without decreasing the demand for a home. That is why we see continuously increasing values in a seller’s market
- When market conditions have low absorption rates, homes compete with many other homes on the market that may be in the same or better condition, which creates pressure to lower pricing.
- In a balanced market, we see prices level off and remain the same, all other factors considered.
Developers watch for absorption rates high enough to signify demand for further development of properties. Think about it: when homes are flying off the market and we have a surplus of buyers, we need more homes for them. During periods with lower absorption rates these developers step aside until the market returns.
If you, or someone you know, is considering selling or buying a home seek the advice of your local Realtor (me!) about how the absorption rate will impact the home’s value and how quickly it might sell.
For more information, call me or email me today!
Heather E. Towe, P.A.
REALTOR®, CRS®, CLHMS®, e-PRO®, PSA®
561-806-8550 | heather.towe.gmail.com
Licensed to Sell Real Estate in Florida
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