What Is Market Absorption Rate
Onereal estate term that is often thrown around by real estateprofessionals that many buyers and sellers are confused about ismarket absorption. In fact, what is market absorption, is oneof the most common FAQsfrom home sellers.
Marketabsorption in real estate is actually a very important statistic,both for buyers and sellers, for a number of reasons. It’simportant that buyers and sellers understand fully what marketabsorption is, how it’s calculated, and how it can impact them.
Ifyou’ll be buying or selling a home, make sure you read on to findout what market absorption is, how it’s calculated, and thepotential affects it can have on your real estate transaction.
WhatIs Market Absorption Rate?
Thenumber of months it would take to sell the homes that are currentlylisted for sale if no other homes were listed for sale in theinterim. This is the easiest way to define what marketabsorption is in real estate.
Forexample, if the current market absorption rate in the Rochesterreal estate market is 4.5,this means it would take four and a half months to sell all theremaining homes that are listed for sale assuming no other propertieswere listed.
Somesellers could careless about their current local marketabsorption, which is actually a mistake. A highlyrecommended realestate interview question toask prospective real estate agents when hiring an agent relates tothe current market absorption. A top producing Realtor® whohas experience in the local market will have a strong grasp of whatthe current market absorption is at all times.
HowIs Market Absorption Calculated?
How Is MarketAbsorption Calculated In Real Estate?
Whilesome buyers and sellers don’t care to know how market absorption iscalculated, there are a lot that do care. Below is a detailedexplanation on how market absorption is calculated in real estate.
Tocalculate market absorption in real estate it is pretty simple. There are two pieces of data that are needed. Thefirst piece of data that is needed to calculate marketabsorption is the number of homes sold in a specified area in amonth. The final piece of data that is needed is the number ofactive homes that are for sale in a specified area.
Belowis an example of how to calculate market absorption for theWebsterNY real estate market.
Number of homessold in Webster NY during December 2015 = 35 homes
Number ofactive homes for sale in Webster NY = 124 homes
Tofind out what the market absorption rate in Webster NY is, simplydivide the number number of active homes in Webster (124)by the number of sold homes in Webster during December (35).
Thecalculation looks as follows: 124 / 35 = 3.54 – The current marketabsorption rate in the Webster NY real estate market is 3.54, whichmeans if no other homes were listed for sale in Webster NY, it wouldtake about three and a half months to sell all the remaining homesfor sale.
HowDoes Market Absorption Affect Home Buyers?
It’spretty well known that market absorption affects home sellers, butit’s rarely discussed how the market absorption rate affectsbuyers. There are a handful of ways that market absorptionaffects buyers.
Ifa specific area or neighborhood that a buyer is attempting topurchase a home in is experiencing a low market absorption rate, itcan be difficult for a buyer to find a suitable property. If anarea or neighborhood is experiencing low market absorption rates, themarket is sometimes referred to a sellers market.
Itcan be tricky for a buyer to successfully buy a home in a sellersmarket. A few of the best tipsfor buying a home in a sellers marketinclude;
Anotherpotential impact that the market absorption rate can have on a buyerrelates to the price they will pay for a home. If a buyer issearching for a home in an area that has a low market absorptionrate, the chances they will be in a multiple offer scenario increasewhich typically will lead to a buyer paying more for a home.
Abuyer who is aware of what the market absorption rate is in themarket they are looking to purchase a home in gives themselves anadvantage over other buyers. For example, if a buyer knows thatthe market absorption rate is indicating a buyers market, it’spossible they will be able to request additional items in their offersuch as requestingsellerconcessions from ahomeowner.
HowDoes Market Absorption Affect Home Sellers
Find Out HowMarket Absorption Rate Affects Home Sellers
Asmentioned above, market absorption can have a large impact onhome sellers. The market absorption rate in a market is a greatindicator to help a real estate agent as well as a seller determinethe current state of a real estate market.
Thereare three different states that a real estate market can experience,a buyers market, a sellers market, or a balanced market. Beloware brief explanations on the different states that a real estatemarket can experience.
Balanced RealEstate Market – A balanced real estate market can easily bedefined as a market that has a similar number of homes for sale incomparison to the number of ready, willing, and able buyers lookingto purchase a home.
Buyers Market –A buyers real estate market can easily be defined as a market thathas 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 marketthat has fewer homes for sale in comparison to the number ofready, willing, and able buyers looking to purchase a home.
Dependingon the market absorption rate a real estate agent can determine ifwhat state the market is experiencing currently. It willvary from market to market, however, below are some general marketabsorption rate ranges to help sellers determine what the state oftheir market is.
Ifthe market absorption rate falls between0 months and 5 months,generally speaking, the market is currently experiencing a sellersmarket. It’s common in many real estate markets that theabsorption rate is lower during the spring real estate market sincethe highest number of homes are being sold during this time of year. It’s critical that sellers know howto prepare for the spring real estate market sincechances are they will be in the midst of a sellers market.
Ifthe market absorption rate falls between5 and 6 months,typically the market is experiencing a balanced market.
Ifthe market absorption rate is morethan 6 months,there is a good chance the market is experiencing a buyers market. If a seller is on the fence about selling their home and themarket is in the midst of a buyers market, it may not be a terribleidea to wait until the market begins shifting back towards abalanced or sellers market.
Whenselling a home, one of the most important decisions that homeownershave to make is when to list their home. The market absorptionrate can play a large part in helping a seller determine if theyshould list their home now or wait.
HowMarket Absorption Affects Appraisals
Oneof the topchallenges to selling a home isreceiving an acceptable appraisal if the buyer is obtaining amortgage. Market absorption rates can affect bank appraisals. If a home is sold close to the asking price or possibly overthe asking price, an appraiser will look at the current marketabsorption rate.
Ifa market is experiencing low absorption rates and there were multipleoffers received on a property that sold for over the asking price, anappraiser can potentially use this as reason for the homes saleprice. This can eliminate problemsresulting from a bank appraisalwhichare frustrating to not only sellers but buyers as well.
Marketabsorption rate is an important real estate term that both buyers andsellers should be aware of. As you can see from the aboveinformation, the market absorption rate can impact the buying andselling experience.
Ifyou’re thinking of buying a home, knowing what the marketabsorption rate is can help you better understand what you’ll be upagainst. Knowing whether or not you should request sellerconcessions or home warranties in your offer is important.
Ifyou’re thinking of selling a home, knowing the absorption rate canhelp you hone in on a specific time to list your home for sale. In addition, it can help you understand whether you will likelybe seeing a large amount of buyers inquiring on your home or not.
Blogsubmitted by: Cyndi Cobb of The Real Estate Market Place –Servicing the Greater Fort Hood and surrounding areas which includes:Killeen, Harker Heights, Temple, Belton, Copperas Cove, Lampasas,Kempner, and Nolanville. Feel free to call if you have any questionsregarding Central Texas Real Estate.
Author: Cyndi Cobb
March 11th 2016
About Cyndi: ...