Tuesday, November 24, 2020 / by Brad Brethouwer
A Quick Lesson on Calculating Absorption Rate
We all know that we’re currently in a seller’s market and have been for a number of years now. Most people rely on the media and voices in the industry such as myself to keep them current on the trends and developments that define the current market.
But how can you tell what kind of market we’re in at any given time?
It starts with a major buzzword you hear in real estate: absorption rate. Absorption rate determines how many homes are on the market and how long it would take to sell them if no new listings came on the market.
Let me explain this further by using an example. Between January and the end of July this year, we had 229 total sales in DeForest-Windsor. Divide that number by the seven-month time frame I mentioned and you’ll get 32.714—the total number of homes sold each of those seven months. Then, you’ll divide that by the 119 active homes on the market now and that produces our absorption rate: 28%.
When you flip those numbers around and divide active listings (119) by the per-month figure (32.714), it’ll come out to 3.63 months, which is how long it would take to sell off all our current inventory.
Given that anything less than six months’ worth of inventory constitutes a seller’s market, 3.63 months of inventory means we’re very much in a seller’s market. Conversely, if we were in a buyer’s market, it would mean we had more than six months’ worth of inventory. And if we were at an even six months, the market would be balanced.
Let’s take a look at another example. In Madison’s market, 2,652 homes sold over the last seven months, and the math says they sold 378.86 homes per month. Divide that number by the 1,020 active listings in their market, which equals a 37% absorption rate or 2.69 months’ worth of inventory—and you’ll have an indicator of a fast market. Put another way, Madison is 10% more of a seller’s market than DeForest-Windsor.
It’s good to know these numbers whether you’re buying or selling your home. If you have any questions, feel free to reach out to us anytime. We’re always happy to help!