What’s a Real Estate “Absorption Rate”?
Simply put, the real estate absorption rate is the formula that indicates whether it is a “buyer’s market” or a “seller’s market”. It denotes how well the market is absorbing the current inventory of listings.
The ultimate question is, “Is the current inventory level shrinking or growing?” Shrinking inventory favors sellers and growing inventory favors buyers.
Absorption rates, in any defined market, are considered one of the very best indicators of whether that market is a seller’s market, a buyer’s market or a neutral market. It is based on how many months will it take to sell the inventory currently on the market.
A seller’s market has a 1-4 month absorption rate while a buyer’s market has absorption rates greater than 7 months. A neutral market indicates 5-6 months of available inventory.
Absorption rate can be calculated in a number of ways. Certain factors are critical such as the time frame. Will the figures reflect a month’s worth of sales, a quarter, a year? In my opinion, working with six months worth of inventory to compute a month’s figure is the most useful.
If you’re end calculation equals the absorption rate for the entire Katy area, this number is meaningless. To end up with a meaningful figure break down the numbers to market segments.
Analyze the sales in a particular subdivision. Bracket related information, for example: sq-footage, age, year built, swimming pool and the like. Add a particular price range to any of these parameters.
The general rule of thumb is to divide the number of homes sold in 6 months by 6 to calculate the number of homes sold in a month. Then, take the current listings and divide by the number of homes sold in 1 month. The absorption rate equals the number of months it takes to sell a home. Here’s a random example:
Homes Sold (1000)/Months (6) = 166 homes sold per month
250 Current Listings/166 homes sold per month = 1.5 months
Using this data, the home should be sold in 1.5 months. Clearly, this example (not reflective of any particular Katy area) indicates a strong seller’s market.
For information about Katy area homes, you can search the entire Houston MLS from this blog. For questions or to tour any area homes, contact me directly at 713-818-2404. I offer financial incentives to my sellers/buyers. I have specialized in Katy real estate for over 20 years. Experience does count!
Copyright © 2007 The Katy Texas Blog That Never Runs Dry 
[...] an in-depth explanation of the real estate absorption rate, the determining factor as to whether it is a buyers or sellers market, based on available [...]
[...] How much inventory is available and how does this impact the health of the real estate market? This is called the absorption rate; for an in-depth explanation of absorption rates see my blog: FuellingKaty.com. [...]