In one of our recent estate agent surveys, the theme of market absorption rate appeared frequently. It is a term that people kind of fear, mostly because they assume you need a degree in economics to get your head around it. That is not true at all, and in this blog post, we will take you through the finer point of this much talked about real estate term.
Market absorption rate is the number of months it would take to sell all the homes that are listed for sale if no further homes were added to the listings. So say the rate in Dhaka is 6, that suggests it would take six months to sell all the remaining houses that are listed, albeit with no other homes listed in the interim.
When you are looking for a new real estate agent like ABC Real Estates Limited a good question to ask is if they know the absorption rate in a particular area. A trusted and respectable agency will have a grasp on the rate in all the areas they operate in.
How do I calculate it?
Two pieces of data are needed to make the calculation: The number of homes sold in a certain month and the number of active homes that are for sale in a specified area.
For Example (hypothetical):
- Number of homes sold in Dhaka in December 2015= 45
- Number of homes for sale in Dhaka= 270
So divide A by B and you get 6. This means if no other homes were listed for sale in Dhaka it would take six months to sell all the remaining homes.
It is very important for a prospective buyer to know the market absorption rate in an area. If for instance, an area is going through a low market absorption rate it can be hard for the buyer to find a suitable property, if the rate is low it is considered a seller’s market.
Buyers in a seller’s market could try getting a pre-approved mortgage, hiring a trusted estate agent, be ready to buy and be flexible in going to viewings.
In a low market absorption rate area, the chances are the buyer will have a lot of competition, which will typically add a premium to the sale price. Knowing the absorption rate will give buyers a key advantage. If a buyer realizes that he is in a buyer’s market he can ask for concessions and negotiate a better deal.
If the market absorption rate is between 0 and five months, this is a seller’s market. If the market falls between five and six months it is a balanced market, with a market over six months being a buyers market.
Affect on appraisals
If a home is sold close to the listed price an appraiser will take a look at the market absorption rate. If the market has a low absorption rate and the place got multiple offers, the appraiser can use this as the reason for the home sales price.
Knowing what the rate of market absorption is will help you understand the context in which you are selling your house. It can guide you as to whether you should wait a while to list your house or to try and sell as quickly as possible. It will give you an idea of whether you will get a lot of interested buyers at your open house viewing or not.