Real Estate Terminology – What is Absorption Rate?
The Absorption rate is roughly how long it will take the current homes on the market to sell. It’s an estimate, based on the current number of listings and current sales. Because those two factors fluctuate from month to month, absorption rate is a rough estimate. It’s an average of how many homes sell each month, based on a 6-month calculation, because anything less than 6 months is too small a sample, and anything greater than 6 months wouldn’t give an accurate picture of what’s going on with values in an area.
If I get the total number of homes that have sold for the last 6 months in an area, say a Frederick zip code or a Frederick County town or, better yet, a neighborhood, and then divide by 6, I’ve got an absorption rate. Average number of homes that sell each month.
If I take the total inventory, or how many homes are on the market in a given area, and divide by the absorption rate, I get the months of inventory, or how long it will take to sell all of the homes in the chosen area (if no more homes were listed).
Why is Absorption and Months of Inventory important?
These numbers are important to buyers as well as sellers. An absorption rate of about four to six months indicates a balanced real estate market. Balanced means a market that does not favor the buyer or the seller. An absorption rate of less than four months indicates a seller’s market. An absorption rate of more than 6 months indicates a buyer’s market.
What Absorption Rate Means to Home Sellers
To a seller, these numbers tell them whether their home is positioned correctly in the market. If they need to sell in 3 months and the absorption rate in their neighborhood is 6 months, then they will need to price their home to sell, without taking months to adjust the price as they test the market.
The absorption rate tells the seller what the normal time on market is for their current market. If their home doesn’t sell in the time that the average comparable home sells, then they know that something is amiss. They will know how accurate, or inaccurate, their pricing is when they find themselves still on the market after the average time for their area.
What Absorption Rate Means to Home Buyers
For a buyer, the opposite can be discerned. If they see a home that has been on the market for longer than the average time for that neighborhood or community, they will think either two thoughts: 1) something is wrong with the house, or 2) the house is overpriced. These homes often receive low-ball offers because of these perceptions.
Understanding real estate terminology, absorption rate for one, helps to navigate the market, negotiate and have proper expectations. Both buyers and sellers can learn how to get the best possible outcome in their market by understanding local market trends.
Contact us for a consultation to find out how much your home is worth in today’s Frederick Real Estate Market.