Is now the right time to buy or sell a home? The absorption rate is the way to know for sure!
What is absorption rate?
It’s is a metric used by some real estate professionals to measure a real estate market’s internal supply and demand. It basically uses the current inventory of homes (supply) and recent sales history (demand) to calculate the market’s current sales rate.
Why Is Absorption Rate Important?
Understanding the absorption rate in a particular neighborhood or area helps buyers and sellers to better understand the nature of the market before placing offers or selling a home. For example, in a seller’s market (a market with less than five months of inventory), when a home is in a desirable area and has great amenities, this home may be able to receive multiple offers very quickly. However, in a buyer’s market, where buyers have lots of choices and increased inventory, the same home may not pique as much interest.
Markets are characterized by the absorption rate as follows (see chart at above for additional details):
Buyer’s Market: Over 6 months of supply
Balanced/Transitional Market: 5 to 6 months of supply
Seller’s Market: Less than 5 months of supply
Obviously, there is a lot that goes into buying or selling a home than just the numbers. However, the absorption rate helps buyers and sellers to understand the current state of the real estate market in order to make more informed decisions about their next purchase or sale.