Absorption Rate and How it Affects Home Pricing
Real estate can be fraught with unfamiliar terms, which is why having a savvy agent can help you determine both price and marketing. One of the frequently asked questions from my clients is about market absorption. Market absorption is a very important, but often overlooked statistic. It’s important for both buyers and sellers to understand what it is, how it’s calculated, and how it impacts home price.
What is Market Absorption?
In the simplest definition, market absorption is how long it would take in the current market, to sell all the homes listed if there were no other properties listed for sale. Seems a little unrealistic to assume, doesn’t it?
Think of it in terms of baking cookies…how long would it take your family to consume two dozen cookies, if you didn’t bake any more cookies in the interim. A week? A month? A day? Maybe even a span of a few hours (I’m looking at you, Spring 2018!)
In a hot market, real estate property can be just like your favorite chocolate chunk cookie…everyone fighting over the last one! Though most home owners have no idea what the market absorption rate is, a great agent will have a grasp on what the current market is—right down to your specific neighborhood! Market absorption rate is expressed as a whole number, like 3, 2.5, or 7.
Still not sure what it is? In real estate terms, if the Charlotte area market absorption rate is 4.5, that means it would take approximately four and a half months to completely sell out of all available homes (assuming no new ones are listed).
How is it Calculated?
It’s actually pretty simple to calculate. An agent just needs to know the number of properties sold in a specific area (such as the Charlotte region, or by zip code, or even by subdivision or neighborhood) within a one month period. Then, the second data point is the current number of active listings for sale in that same specified area.
- Number of homes in Belmont, NC that sold in September 2019 = 596
- Number of active homes for sale in Belmont, NC = 219
To calculate absorption rate, divide the number of actives by the number of sold. For our example, that looks like 219 / 596 = .37— which means that if no other homes are listed for sale in Belmont, it would take about a third of a month to sell all remaining homes. (Yeahhh, I did tell you it was booming out here in Gaston County, didn’t I?)
Impact of Market Absorption
Market absorption rate is a great indicator of what kind of market we are trying to enter. There are three different states that a real estate market can experience, a Buyers market, a Sellers market, or a Balanced market. Below are brief explanations on the different states that a real estate market can experience.
- Buyers Market – A buyers real estate market is defined as a market that has more homes for sale in comparison to the number of ready, willing, and able buyers looking to purchase a home.
- Sellers Market – A sellers real estate market can easily be defined as a market that has fewer homes for sale in comparison to the number of ready, willing, and able buyers looking to purchase a home.
- Balanced Real Estate Market – A balanced real estate market is a market that has a similar number of homes for sale in comparison to the number of ready, willing, and able buyers looking to purchase a home.
Ever heard someone say, “we’re in a Sellers Market….”?
Depending on the market absorption rate, a real estate agent can determine if what state the market is experiencing currently. It will vary from market to market, maybe even neighborhood to neighborhood, however, below are some general market absorption rate ranges to help sellers determine what the state of their market is:
Absorption rate = 0-4 Typically considered a Sellers market, where demand for properties in that specific area greatly exceeds the available inventory of homes for sale
Absorption rate = 4-6 Considered a Balanced market, where demand for properties is about equal to the number of buyers seeking homes in that area
Absorption rate = 7-12 If rates are in this range, there’s a good chance we are experiencing a buyers market, where there are abundant properties available and fewer buyers.
A great real estate agent will be able to counsel a seller, and give advice on the best time to list, options to consider, and assist in preparing the homeowner in potential pitfalls.
Now that you understand how market absorption affects home sellers, it’s important to also know how market absorption rate affects buyers. Two of the greatest potential impacts are finding a property to purchase and the price a buyer may expect to pay.
If a specific area or neighborhood that a buyer is attempting to purchase a home in is experiencing a low market absorption rate, it can be difficult to find a suitable property, because there’s usually low inventory or a lack of homes on the market.
In the greater Charlotte area, we have been squarely in the midst of a Sellers market for years. It can be tricky for a buyer to successfully buy a home in a Sellers market. A few of the best tips for buying a home in such a market include:
- Get pre-approved, not pre-qualified – There is a difference between a mortgage pre-approval and pre-qualification
- Hire a top real estate agent to assist your search – Don’t try to forage on your own, or you will likely miss out!
- Be realistic and flexible – Competing offers may mean you need to scale back on your must haves, or be willing to compensate the seller for finding that perfect “dream home”
- Be ready to buy – Have your finances in order, understand how down payment can impact your offer’s chances of being accepted, and be willing to pull the trigger fast when you find “THE ONE”
Another potential impact relates to the price a buyer will pay for a home. For example, if a buyer is searching for a home in an area that has a low absorption rate, chances are they will be in a multiple offer scenario which may lead to paying more for a home.
A buyer who is aware of the market absorption rate in the area they are looking to purchase has an advantage over other buyers. Want to know more? Ask me how!
Don’t forget that absorption rate also factors into home appraisals. It’s not just Buyers and Sellers who need to be concerned. Lenders will also be watching the market. Market absorption rates can affect bank appraisals. If a home is sold close to the asking price or possibly over the asking price, an appraiser will look at the current market absorption rate.
If a market is experiencing low absorption rates and/or there were multiple offers received on a property that sold for over the asking price, an appraiser can potentially use this as justification for the home sale price. A great listing agent will provide that information to the appraiser before the appraisal is completed.
Market Absorption can have a huge impact on real estate. If you’re thinking of buying a home, understanding absorption rate can help you understand what you’ll be facing in today’s market conditions. Considering selling a home? The absorption rate can help you determine the best time and pricing strategies to list your home for sale.
If you or someone you know is considering buying or selling a home in the next year, reach out to me. I’d be happy to discuss how to best prepare for today’s market!