Real Estate Explained | What is Absorption Rate
How is the difference between a “sellers market” and “buyers market” known? It can be confusing at times, but it is really simple. There is a way that we can see what is happening in the market and determine if we are in a buyers or sellers market. How we determine the difference is by Absorption Rate. This simple concept is often misunderstood regarding this fundamental measure of market conditions.
ABSORPTION RATE is the mathematical representation of the relationship between supply and demand. The total amount of available homes is divided by the total amount of homes sold in the previous month. The resulting number represents the number of months it would take, at that same pace, to sell the entire inventory of homes.
So what is considered a Buyers or Sellers Market in Real Estate Sales
- “Normal Market” conditions exist when the Absorption Rate is 5-7 months.
- “Sellers Market” conditions exist when the Absorption Rate is lower. (1-4 month)
- “Buyers Market” conditions exist when the Absorption Rate is higher. (7+ months)
Absorption Rate is not all you need to look at to determine the condition of the Niagara Falls Real Estate market. In fact, many people misunderstand the application of this important ratio, and overlook several important factors:
- To have real meaning to you in your practice, or in understanding the Niagara Falls Real Estate market you are buying or selling homes in, you need to look at not the overall conditions, but the local, price-range specific conditions. A $35,000-$40,000 home may have 5 months of inventory, while a $75,00-$80,000 range may have 13 months. While the combined of all of Niagara Falls might be 9 months.
- The ratio reflects a general condition or a trend. That is, it is not specific. Specific property features, condition, and price will do more to determine how fast it will actually sell than any mathematical formula will.
Importance to Western New York Sellers:
Knowing the market conditions can help you determine the appropriate asking price for your home, based on your need for a timely sale. If the Absorption Rate in the 300K to 500K is 4.2, while 500K to 800K is 17.4, and you were considering pricing around 510K, you might want to reconsider and price at 499K instead if you need a faster sale.
Importance to Western New York Buyers:
Knowing the market conditions in the specific areas you are looking to buy in will prepare you for negotiating. It the Absorption rate in WNY is 3.1, while in Buffalo it is 15.2, and you want to negotiate a lower than asking price, you can see that in Buffalo that may be more likely than in Niagara Falls.
How is Absorption Rate Calculated?
Knowing Western New York’s Absorption Rate, helps to track trends in the Niagara Falls Real Estate Market. Absorption rate is NOT an exact science. Figuring it is based on the premise that one will be looking for a trend. To calculate Absorption rate you will need:
- How many listings are currently on the market in a given area? In this instance listings are both active and pending homes.
- How many listings sold last month?
Now that you know those numbers, you will need to:
- Add together the number of Active/Pending Listings 1,000
- # of Sold Last Month 100 x 12 divided by 52 = 23.08
- # Sold of Active divided by the number of sold 1,000/23.08 = 43.33 weeks
- Absorption Rate = 10.08 months
While absorption rate may just be a guide, it is another valuable tool for buyers and sellers to better understand the real estate market and assist them to make informed decisions about Real Estate.
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