What is Absorption Rate?

Absorption Rate is a way to spot trends in your market.  It’s simple math and can be done by almost anyone.  It helps agents and sellers determine how long it might take to sell a specific property in a specific neighborhood.  It helps buyers determine whether or not it is a “buyers market” and really give them some leverage in negotiating.  

You need to figure out two sets of numbers.  They are:  1.  The # of homes currently on the market.  2.  The # of homes that have sold in the past 30 days.  By sold we mean gone under contract/accepted an offer.  Divide the number of homes on the market by the number of homes that have gone under contract and you have your absorption rate.  This number is how many months it will take to sell the currently inventory. 

Example:
There are currently 655 properties (single family, condo, townhomes) for sale in Lincoln Park, Chicago.  In the past 30 days 79 properties (single family, condo, townhomes) have Sold (accepted contracts.)  At that rate it will take 8.3 months to sell them all.  Thus the absorption rate is 8.3 months.

That is the easy way to do it.  There is another way I like to do it that gets a little more specific and breaks the absorption rate into weeks instead of months.  You take the same two numbers as above….655 properties and 79 under contract in the past 30 days.  Instead of simply dividing 79 into 655 you do the following:

Take 79 and multiply by 12 (79 x12=948.)  Take that total and divide by 52 for the number of weeks in a year (948/52=18.23.)  Divide this number into the total number of properties currently on market (655/18.23=35.90.)  This is how many weeks it will take to sell those properties, 36 weeks. Your absorption rate in this case is 36 weeks which at the end of the day is pretty comparable to 8.3 months. These are actuals figures for Lincoln Park, Chicago.

Personally I like the second method that breaks it into weeks.  Just the way my brain works but the quick math that breaks it down monthly is pretty effective.