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Do You Know Your Absorption Rate?

Posted By Paula Henry on Tuesday, August 07, 2007 4:52:00 AM | 4 Comments

Absorption rate isn't a topic of interest to most people, as it relates to Indianapolis Real Estate. Unless, of course, you are buying or selling a home or are a Realtor who studies the market. Then, it becomes a very interesting topic. While it may be a bit boring, I hope to simplify the information, as well as help you understand the importance of knowing the absorption rate of your Indianapolis home.

The absorption rate is a number which represents a particular market's ability to sell the current inventory based on supply and demand. In real estate, this number is determined by dividing the current amount of homes available by the amount sold in the previous month. If the available inventory or currently listed homes on the market is 600 and the sales in the past month were 65, the absorption rate would be 9.2 months. This indicates it would take a little over 9 months to sell all the currently available homes, if no additional homes were to come on the market.

Example: 600/65 = 9.2

When given as a percentage the above example would equal 10.8%, with 10.8% indicating the percentage of all available homes sold in a given period of time.

You may ask, 'What does this have to do with buying or selling a home'? Quite a bit, actually. Let's assume you want to sell your home. The most recent comparable sales price of homes like yours shows three recent sales at $255,000, $248,900 and $254,000. The absorption rate for homes in the price range of $225,000 -249,999 is 3.6 and the absorption rate for homes in the price range of $250,000 - $275,000 is 5.2. Should your motivating factor be time, you may want to price below $249,999. If time is on your side, you can price a little higher, assuming the comps support the price.

When buying a home, taking a look at the absorption rate can help you determine how many homes are on the market in your price range. Armed with the additional knowledge of the absorption rate, you can better determine the best price to offer on a home. Additionally, knowing how many homes are available in your price range could offer more negotiating leverage.

Absorption rate also helps determine the type of market we are in. A higher absoprtion rate indicates a buyers market.

Absorption rate of 1-3 months = A Seller's Market

Absorption rate of 4-6 months = A Normal Market

Absorption rate over 6 months = A Buyer's Market

Now, wasn't that fun!

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Discussion

#1 Posted by Paula Henry at 8/13/2007 4:05 AM

I have found most people don't want to know all the details, just a summary of what each detail means for them. Absorption rates, when tracked regularly, provide a good indication which direction a market is heading. The direction can be different by specific neighborhood within a city.

#2 Posted by Ashley Drake Gephart - ABQ Homes at 8/10/2007 10:45 PM

Paula it might not be a topic most people think about it when it comes time to buy or sell it is one they must think about. Good explanation about absorption rates.

#3 Posted by Jennifer Fivelsdal at 9/2/2007 6:36 PM

Paula - I love your blog. Great explanation of the absorption rate.

#4 Posted by Car DVD at 10/18/2009 6:07 PM

The absorption rate is very useful especially when you are going to selling or buying a home.