Absorption Rate

What is the ‘Absorption Rate’

The absorption rate is the rate at which available homes are sold in a specific real estate market during a given time period. It is calculated by dividing the average number of sales per month by the total number of available homes. The figure shows how many months it will take to exhaust the supply of homes on the market.

Explaining ‘Absorption Rate’

The absorption rate does not take in to account additional homes that enter the market. A high absorption rate may indicate that the supply of available homes will shrink rapidly, increasing the odds that a homeowner will sell a piece of property in a shorter period of time. Traditionally, an absorption rate above 20% has signaled a seller’s market in which homes are sold quickly. An absorption rate below 15% is an indicator of a buyer’s market in which homes are not being sold as fast.

Example of Absorption Rate

Suppose a city has 1,000 homes currently on the market to be sold. If buyers snap up 100 homes per month, the supply of homes will be exhausted in 10 months (1,000 homes divided by 100 homes sold per month). Alternatively, if 100 homes are purchased from the baseline of 1,000 homes, the absorption rate is 10% (100 homes sold per month divided by 1,000 homes available for sale). In this situation, if a homeowner is looking to sell a piece of property, he knows that half of the market will be sold out in five months.

Users of Absorption Rate

Real estate professionals use the absorption rate. Brokers utilize the rate in pricing homes. For example, in market conditions with low absorption rates, a real estate agent may be forced to reduce the listing price to entice a sale. Alternatively, if a real estate recognizes the market’s high absorption rate, the agent can increase the price without potentially sacrificing demand for the home.

Further Reading

  • Determinants of increasing EU funds absorption capacity in Romania – ideas.repec.org [PDF]
  • The economics of conservation subdivisions: Price premiums, improvement costs, and absorption rates – journals.sagepub.com [PDF]
  • EU funds absorption rate and the economic growth – halshs.archives-ouvertes.fr [PDF]
  • Absorption of Structural Funds–International Comparisons and Correlations – www.sciencedirect.com [PDF]
  • Influence of specific absorption rate averaging schemes on correlation between mass-averaged specific absorption rate and temperature rise – www.tandfonline.com [PDF]
  • Structural funds and economic crises: Romania's absorption paradox – www.sciencedirect.com [PDF]
  • The Impact of Productivity, Investment and Real Wages on Employment Absorption Rate in South Africa – www.mdpi.com [PDF]
  • Note: Gas absorption in water with microchannel devices – www.tandfonline.com [PDF]