In light of last weeks New Homes Sales data and Existing Homes Sales report, let’s review a term that real estate professionals use to describe housing inventory.

Absorption Rate is a real estate term for the length of time required to sell all of a given stock in a given area. 

We can use it to determine how quickly homes are selling in a neighborhood, city, or region.

The formula to calculate Absorption Rate is simple:

  • Add up the number of homes on the market
  • Divide it by the number of homes taken off the market in the past 30 days because offers were accepted for the sale of those homes

For example, if 500 homes are on the market and 89 of these homes received offers in the past 30 days, the absorption rate is 500/89, or 5.6 months. 

In generally, the smaller the absorption rate, the more seller-friendly the region.

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One thought on “Understanding Real Estate Terms: Absorption Rate

  1. Tony,

    If I can add to what you’ve offered… Something else we’ve been addressing in our office is the “accumulation rate” of houses.

    While the absorption rate tells us how many months it will sell the homes that are currently active, it’s also helpful to look at how quickly the homes are mounting in an area so you can forecast what the absorption rate might be next month or further down the road.

    To figure the accumulation rate, take the number of homes that have come on the market, say in the last 6 months, and subtract how many have sold. Then take that number and divide by 6.

    For instance, if 24 homes have come on the market and 12 have sold, you have an accumulation rate of 2 houses per month. We’ve found this is a very effective tool to use in competitive pricing.

    Stephanie

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