Definition
The Market Absorption Rate is a real estate metric that measures the speed at which homes are selling in a specific market. It is calculated by dividing the total number of homes sold in a given period by the number of active listings, indicating how long it would take for the current inventory to sell at the current sales pace.
Explanation
The absorption rate is a key indicator of market conditions, helping buyers, sellers, and investors understand whether a market favors buyers or sellers:
- High absorption rate (seller’s market): Homes are selling quickly, leading to higher prices and increased competition.
- Low absorption rate (buyer’s market): Homes are selling slowly, leading to price reductions and more negotiating power for buyers.
Formula for Market Absorption Rate:
Absorption Rate = (Total Homes Sold in a Month / Total Active Listings) × 100
A rate above 20% typically indicates a seller’s market, while a rate below 15% signals a buyer’s market.
Example
A real estate agent analyzes a city’s housing market:
- 500 homes were sold in the past month.
- 2,000 active listings are available.
(500/2000) × 100 = 25%
Since 25% is above 20%, this suggests a seller’s market, meaning homes are selling quickly, and prices may rise due to demand.