Originally posted at Jersey Real Estate Scene: What Is The Absorption Rate In Real Estate And How Is It Calculated?
What is absorption rate and how is it calculated?
The Absorption Rate is a calculated "pace" at which properties listed for sale have been selling in a specific market area. When measured consistently, absorption rate is a useful indicator in determining future supply and demand trends in a market. If market conditions remain the same and no new listings are added to the area's inventory, it determines the pace at which current inventory should take to sell out. This is most often measured in months and a "healthy" (balanced) market's absorption rate generally falls in the 5 - 7 month range.
The absorption rate is certainly not a highly scientific calculation or absolute in its findings, but it does help to establish a trend line and is a good tool for a savvy agent or broker to have in their belt as it further establishes them as a market expert. Another useful indicator and a better measure of a housing market's overall health is liquidity. (Click the link to find out more.)
What information do we need to calculate the absorption rate?
We need 3 pieces of information:
- The # of SOLD listings in the market area
- Specific TIME frame to be measured
- The # of ACTIVE listings (homes or condos currently listed for sale)
How do we calculate the absorption rate and find out how many month's supply of inventory we have?
We divide the # of homes SOLD by the TIME frame to get the "Absorption Rate". Then, divide the # of ACTIVE listings by the absorption rate to see how many months inventory we have (...or, how long it should take to sell off the current actively listed properties).
Lets say 24 homes sold in Your Town, NJ in the last 6 months (24 / 6 = 4). So, the absorption rate is 4 homes sold per month. If the current active inventory in Your Town is 40 homes (40 / 4 = 10), it should take 10 months to sell off the homes that are currently listed for sale. (This could support a conclusion that there may be an oversupply of available homes in Your Town, currently.)
As I'd mentioned, absorption rate is not an exact science, rather a good market indicator that is very useful in establishing local market supply and demand trends.
I’m Brian Morgenweck, Broker/Owner
of Power Realty Group in Bergen
County, NJ. If you have any questions,
I’m here to help.
Connect with me at (201)489-3020.
Please visit JerseyHomeScene &
JerseyCondoScene & find out how to
list your Bergen County home or
condo with greater confidence... and
get better results.
What Is Absorption Rate & How Is It Calculated?