What is an Absorption Rate?
In real estate, the term “absorption rate” is thrown around a lot. Different people define the term in different ways, but either way an absorption rate is all about supply and demand.
As an indicator of what has sold/gone under contract.
The absorption rate is sometimes used as an indicator of how many properties are selling or going under contract in a month. This rate is calculated by dividing the number of properties currently under contract by the number of active listings plus the under contracts. Sometimes the number of “sold” properties is used instead of or in addition to the “under contract” properties.
All of these numbers can move around – some contracts fall apart, the numbers in the multiple listing service can be flawed – but over time, a pattern emerges. When these numbers are broken down into price ranges, and neighborhoods, they become a good indicator for buyers or sellers of the strength of the market in their particular neighborhood.
Buyers’ Market? Sellers’ Market?
So, what do those rates mean?
When the absorption rate is above 33%, it begins to look like a seller’s market. Today we see that in some price ranges in some neighborhoods in DC. When the absorption rate goes above 50%, you see listings getting multiple bids.
When the absorption rate is below 20%, the market tends to tip in the buyer’s favor. This is where some upper brackets markets have been for a pretty long stretch of time. The causes can be a number of things including the economy, over pricing, bad presentation of a property or ineffective marketing.
What about Great Falls and McLean?
In Great Falls, there are currently 146 active listings and there are 22 under contract. Great Falls absorption rate is therefore 13%, a buyers’ market. Notably, 30 of these properties – 20% – have been on the market for more than a year. It is worth pointing out that, regardless of the overall market, when a property in Great Falls comes on the market well presented and well priced, it sells quickly and for near original list price.
In McLean, there are currently 286 active listings and there are 89 properties under contract. McLean’s absorption rate is around 24%, a pretty balanced market overall. 31 of the active listings in McLean or about 11% have been on the market for more than a year.
Presentation, pricing and marketing are critically important in McLean and Great Falls.
Absorption Rate as an Indicator of Time on the Market
Absorption rate is also used to refer to the calculation of how long it will take for all the homes on the market to be sold, or absorbed, at the current rate of home sales and with the current number of homes on the market.
This number is found by determining the average number of homes sold per month (number of homes sold in the past year divided by 12). Then, divide that number into the number of current active listings and that will tell you how many months it will take to sell all of the current inventory on the market.
This too is a moving target, because of course the market is constantly changing. Plus, just because there is a 3.5 month absorption rate in your neighborhood, does not mean that your house will take 3.5 months to sell. Remember this number is an average.
All of these numbers are a snapshot of the market at a moment in time. It is when we look at trends in these numbers that they become useful as a good indicator of where the housing market has been, and where it might be headed.
What does the Absorption Rate Mean to Me?
The absorption rate calculation, whether it refers to demand or supply of homes, is an informative way to look at trends in your neighborhood. In a buyers’ market, a seller needs to pay extra attention to presentation and marketing. In a sellers’ market, a buyer needs to be ready to jump and write a good offer when the right house comes along.