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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Absorption Rate
There are hundreds and thousands of houses sold every month in a particular period. As you know that the real estate market is never constant and could sway any way at the time you are looking to purchase your dream home.
There are many ways and parameters to understand where the real estate market stands at the time when you are looking to buy a new property. One such simple yet effective parameter is the absorption rate.
In this post, we will understand what is an absorption rate in real estate and how it works.
What Is The Absorption Rate In Real Estate?
The absorption rate is a parameter that is used to evaluate the rate at which the currently available real estate properties are sold in a certain market during a specific period.
This rate indicates how long it will take to sell the available properties in the specific market.
Since the rate of absorption is the best parameter to determine how fast the real estate properties are selling in the market, it is used by many real estate investors to understand whether it is a seller’s market or a buyer’s market.
Moreover, the rate of absorption also helps the sellers to set their property sales prices to compete in the given market.
How Is Real Estate Absorption Rate Calculated?
The formula to calculate the real estate rate of absorption is very easy. It is the total number of listings divided by the number of properties sold at a specific time.
This rate will differ based on the period that you are looking to find the rate of absorption for.
For example, you want to know the absorption rate in an area for the last month where there were 2,000 listings out of which 520 properties were sold in the last one month.
So the rate of absorption in this area for last month is 520/2000×100=26%.
In the above example, the rate of absorption for one month in the specified area is 26%.
The rate will differ based on the area of the market and the lent of time. A larger area would have more properties listed compared to a smaller area and some individuals may what to check the rate for the last six months.
This will change the rate of absorption in the given market as the formula itself is flexible and you can use it according to your benefit.
Why Is Absorption Rate Important?
As per the above example, the rate of absorption in that area was 26% in one month. According to the industry thumb rule, anything over 20% is considered a good real estate rate of absorption.
This is an indication that the current market is a seller’s market where the properties are going to be sold quickly once they are listed on the market.
If this rate is less than 15% it shows an indication of a buyer’s market where the properties listed on the market will take a longer time to sell.
For any real estate investor, this information could be important if you are in the market to buy or sell a real estate property and plan your strategy accordingly.
If you are looking to sell the property and you are unaware of the current market, you calculate the rate of absorption in the current market which comes to 22%.
In this case, you know that it is a seller’s market and you can probably higher price for the property that you are looking to sell.
However, if the rate comes to 13 percent, you may want to hold the property and sell it at a later date in the future.
Conclusion
The absorption rate in real estate is one of the simplest yet powerful ways to determine the sway of the current real estate market.
It will not only let you know if the market is the seller’s or buyer’s, but it will also help you plan your strategy whether to take benefit or wait till the market is in your favor.
You can get in touch with your trusted real estate agent to understand the rate of absorption in your area in more detail.
