What in the world is an absorption rate? In real estate, Realtors like to look at all kinds of data and statistics. Absorption rate by definition is the rate at which the current inventory turns over. I will explain how it is calculated, and then I will explain what that means as a buyer or seller of real estate.To determine an absorption rate, I take the total number of homes sold over a given time period, and divide that by the number of months it took to sell them. That gives us an average monthly number of homes sold. Then we take the total number of active listings and divide that by the average monthly sold units. Ok, here is an example. According the regional multiple listing service, in Eden Prairie, over the last 12 months, there were 198 closed single family homes. Take that number and divide by 12 which tells us on average 16.5 homes sold per month. Currently there are 250 active single family homes on the mls for sale. 250 divided by 16.5 tells us it will take 15 months to sell off our current inventory.
As a guide, a balanced market is considered a 6 month supply of inventory or a 6 month absorption rate. We can also use this in more specific segments of the market, for example different price points, or different types of housing. This is valuable to help determine pricing of a homes value.
From our prior example, Eden Prairie’s absorption rate for all single family homes in the last 12 months was 15 months. However, if we look at homes in the price range of 300-400 thousand, we show a different market. In the last three months, it shows an absorption rate of 5.77 months! Indicating a bit of a shortage of homes available in this price range. I can see it too based on what I have seen available for buyers in that price range.
We can also see trends based on 3 month windows. Eden Prairie homes in that same price range 7-12 months ago had an absorption rate of 19 months. Then 4-6 months ago was at 8.74 months. So, the trend is that homes in the 3-400k range are selling, and are in demand! So as a seller of a $350,000 home you know you have a good chance of finding a buyer!
If you would like absorption data for your home or a specific area, let me know and I would be happy to email that report to you!
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