What's the Absorption Rate and Should You Care?
Contributing writer: Thomas Schoenbeck
"Always ask your Realtor what the absorption rate is for your neighborhood."
When selling a home, most sellers want to know, how fast will it sell? While there’s no certain way to know for sure, but there is a way to determine what market data indicates when it should sell. This market data is referred to as absorption rate. Always ask your Realtor what the absorption rate is for your neighborhood. (This can be a good clue to you if your Realtor® really has their finger on the pulse of your market.) So, what is absorption rate? It’s really not a mysterious market factor and it’s not difficult to calculate. The absorption rate should tell you the approximate length of time it may take to sell your home (assuming of course your home is market priced.)
The first thing to do is count the number of active homes on the market in your neighborhood. Let’s say there are 10 homes on the market right now. Then select a time reference; let’s say 12 months. Take the number of homes sold in the past 12 months and divide by 12. That’ll give you the average number of homes that sell in a 30-day period. Take that 30-day average and divide by the number of active homes on the market. That result is the absorption rate.
So, for our example of there being 10 homes for sale in your neighborhood, and let’s say there were 24 homes that sold in the past 12 months, then following our equation; 24÷12= 2 homes sold every month (as an average.) Now, take the 10 homes on the market and divide by 2. Your answer is 5, so in this case it should take 5 months to sell your home. And the rate is 20%, meaning 20% of the homes will sell every month.
As a seller, you want to be sure you’re priced to be the next sale, not the last. Don’t forget, always ask your Realtor® what the neighborhood absorption is.