Real Estate Market Absorption Rate â€“ What Does It Mean & How Does It Affect Me?
One real estate term that is often thrown around by real estate professionals that many buyers and sellers are confused about is market absorption. Â In fact, what is market absorption, is one of the most common FAQs from home sellers.
Market absorption in real estate is actually a very important statistic, both for buyers and sellers, for a number of reasons. Â Itâ€™s important that buyers and sellers understand fully what market absorption is, how itâ€™s calculated, and how it can impact them.
If youâ€™ll be buying or selling a home, make sure you read on to find out what market absorption is, how itâ€™s calculated, and the potential affects it can have on your real estate transaction.
What Is Market Absorption Rate?
The number of months it would take to sell the homes that are currently listed for sale if no other homes were listed for sale in the interim. Â This is the easiest way to define what market absorption is in real estate.
For example, if the currentÂ market absorption rate in the Rochester real estate market is 4.5, this means it would take four and a half months to sell all the remaining homes that are listed for sale assuming no other properties were listed.
Some sellersÂ could careless about their current local market absorption, which is actually a mistake. Â A highly recommended real estate interview question to ask prospective real estate agents when hiring an agent relates to the current market absorption. Â A top producing RealtorÂ® who has experience in the local market will have a strong grasp of what the current market absorption is at all times.
How Is Market Absorption Calculated?
While some buyers and sellers donâ€™t care to know how market absorption is calculated, there are a lot that do care. Â Below is a detailed explanation on how market absorption is calculated in real estate.
To calculate market absorption in real estate it is pretty simple. Â There are twoÂ pieces of data that areÂ needed. Â The firstÂ piece of data that is needed to calculate market absorption is the number of homes sold in a specified area in a month.Â The final piece of data that is needed is the number of active homes that are for sale in a specifiedÂ area.
Below is an example of how to calculate market absorption for the Webster NY real estate market.
- Number of homes sold in Webster NY during December 2015Â = 35Â homes
- Number of active homes for sale in Webster NY = 124 homes
To find out what the market absorption rate in Webster NY is, simply divide the number number of activeÂ homes in WebsterÂ (124) by the number of soldÂ homes in Webster during December (35).
The calculation looks as follows: 124 / 35 = 3.54 â€“ The current market absorption rate in the Webster NY real estate market is 3.54, which means if no other homes were listed for sale in Webster NY, it would take about three and a half months to sell all the remaining homes for sale.
How Does Market Absorption Affect Home Buyers?
Itâ€™s pretty well known that market absorption affects home sellers, but itâ€™s rarely discussed how the market absorption rate affects buyers. Â There are a handful of ways that market absorption affects buyers.
If a specific area or neighborhood that a buyer is attempting to purchase a home in is experiencing a low market absorption rate, it can be difficult for a buyer to find a suitable property. Â If an area or neighborhood is experiencing low market absorption rates, the market is sometimes referred to a sellers market.
It can be tricky for a buyer to successfully buy a home in a sellers market. Â A few of the best tips for buying a home in a sellers market include;
- Get pre-approved, not pre-qualified â€“ There is a difference between a mortgage pre-approval and pre-qualification
- Hire a top buyers real estate agent
- Be realistic and flexible
- Be ready to buy
Another potential impact that the market absorption rate can have on a buyer relates to the price they will pay for a home. Â If a buyer is searching for a home in an area that has a low market absorption rate, the chances they will be in a multiple offer scenario increase which typically will lead to a buyer paying more for a home.
A buyer who is aware of what the market absorption rate is in the market they are looking to purchase a home in gives themselves an advantage over other buyers. Â For example, if a buyer knows that the market absorption rate is indicating a buyers market, itâ€™s possible they will be able to request additional items in their offer such as requesting seller concessions from a homeowner.
How Does Market Absorption Affect Home Sellers?
As mentioned above, market absorption can haveÂ a large impact on home sellers. Â The market absorption rate in a market is a great indicator to help a real estate agent as well as a seller determine the current state of a real estate market.
There are three different states that a real estate market can experience, a buyers market, a sellers market, or a balanced market. Â Below are brief explanations on the different states that a real estate market can experience.
- Balanced Real Estate Market â€“ A balanced real estate market can easily be defined as a market that has a similar number of homes for sale in comparison to the number of ready, willing, and able buyers looking to purchase a home.
- Buyers Market â€“ A buyers real estate market can easily be defined as a market that has moreÂ homes for sale in comparison to the number of ready, willing, and able buyers looking to purchase a home.
- Sellers Market â€“ A sellers real estate market can easily be defined as a market that has fewerÂ homes for sale in comparison to the number of ready, willing, and able buyers looking to purchase a home.
Depending on the market absorption rate a real estate agent can determine if what state theÂ market is experiencing currently. Â It will vary from market to market, however, below are some general market absorption rate ranges to help sellers determine what the state of their market is.
- If the market absorption rate falls between 0 months and 5 months, generally speaking, the market is currently experiencing a sellers market. Â Itâ€™s common in many real estate markets that the absorption rate is lower during the spring real estate market since the highest number of homes are being sold during this time of year. Â Itâ€™s criticalÂ that sellers know how to prepare for the spring real estate market since chances are they will be in the midst of a sellers market.
- If the market absorption rate falls between 5 and 6 months, typically the market is experiencing a balanced market.
- If the market absorption rate is more than 6 months, there is a good chance the market is experiencing a buyers market. Â If a seller is on the fence about selling their home and the market is in the midst of a buyers market, it may not be a terrible idea to wait until the market begins shifting back towards a balanced or sellers market.
When selling a home, one of the most important decisions that homeowners have to make is when to list their home. Â The market absorption rate can play a large part in helping a seller determine if they should list their home now or wait.
How Market Absorption Affects Appraisals
One of the top challenges to selling a home is receiving an acceptable appraisal if the buyer is obtaining a mortgage. Â Market absorption rates can affect bank appraisals. Â If a home is sold close to the asking price or possibly over the asking price, an appraiser will look at the current market absorption rate.
If a market is experiencing low absorption rates and there were multiple offers received on a property that sold for over the asking price, an appraiser can potentially use this as reason for the homes sale price. Â This can eliminate problems resulting from a bank appraisal which are frustrating to not only sellers but buyers as well.
Market absorption rate is an important real estate term that both buyers and sellers should be aware of. Â As you can see from the above information, the market absorption rate can impact the buying and selling experience.
If youâ€™re thinking of buying a home, knowing what the market absorption rate is can help you better understand what youâ€™ll be up against. Â Knowing whether or not you shouldÂ request seller concessions or home warranties in your offer is important.
If youâ€™re thinking of selling a home, knowing the absorption rate can help you honeÂ in on a specific time to list your home for sale. Â In addition, it can help you understand whether you will likely be seeing a large amount of buyers inquiring on your home or not.
About the authors: The above article â€œWhat Is Market Absorption Rate In Real Estate?â€ was provided by the Keith Hiscock Sold Team (Keith & Kyle Hiscock). Â© 2016, Kyle Hiscock. All rights reserved.