You may or may not have heard the term “Absorption Rate” before. Prior to becoming a Realtor® I had never heard the term before. Essentially, Absorption Rate is the number of months it would take to sell off the current inventory of houses if no new properties were listed for sale and no currently active homes are removed from the market.
Calculating Absorption Rate
Calculating Absorption Rate is actually quite simple. You take the number of homes that sold in a specific amount of time (for this example I am going to use 6 months), you divide the number of sales by the number of months. Lets say 4976 homes sold in the last 6 months. We take 4976 and divide by 6 to get 829.33. We then divide the number of currently active listings on the market by that number. Let’s assume there are 5091 current listings. We divide 5091 by 829.33 to get our Absorption Rate of 6.14 months to absorb the current listings.
So that is a pretty random number. Is it good, is it bad, what does it mean. You’ve no doubt heard the terms Buyer’s Market, Sellers Market and Balanced Market and wondered how the heck do they tell what type of market it is. You can see where I’m going here.
Types of Market
A balanced market is generally considered to be an absorption rate of +/- 6 months. As the rate gets above 6, we start moving into a buyer’s market, as there are more homes on the market and less or the same number of homes selling in the given period. Conversely, as the rate dips down below 6, we start to move into a seller’s market as the number of active homes for sale has gone down or the number of homes selling has gone up (or both).
What Type of Market are We in Now?
The numbers I used above are actually the numbers for the City of Edmonton as of today (April 4, 2017). So, we have an absorption rate of 6.14 months, meaning we are still in a slight buyer’s market but are inching closer and closer to a balanced market.
Absorption Rate can be used on a relatively grand scheme like I’ve used above (the entire City of Edmonton), or it can be scaled down to your specific neighbourhood.
If you are curious what the Absorption Rate is in your area, let me know and I would be happy to calculate it for you.