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Formula – Real Estate Absorption Rate
I/S = M
I – Number of active properties available on current market
S – Number of actual home sale
M – Absorption Rate
The absorption rate of real estate refers to the rate which properties for sale are selling in a given area over a specified period of time.
This serves as an indication of how long it takes for a house to be made available for sale on the market until the time where it is finally sold.
This is somewhat similar to the time on market and the months of property inventory with very slight differences.
For example, if I=100 and S=25, then the absorption rate is 4.
This means that it takes 4 months for a house to be sold once it is put on the market or available on property listings.
It can also be expressed as a percentage of 25% (25/100).
The higher the percentage would mean the faster houses are bring sold in the market. With 1 meaning it takes only one month for them to sell.
The application of absorption rate in real estate is usually by researchers and statisticians to evaluate how strong demand is in specific markets.
This is why these equations are most commonly used for particular states, cities, areas, neighborhoods, etc.
A limitation of absorption rate is that it doesn’t account for new homes that have entered the market for sale as the numbers used to calculate it are based on collated data.
And that takes time to put together.
Home sellers equipped with the latest and most current absorption rate might use the figure to delay lowering asking prices when they are not even halfway through the market standard.
For example, if the rate is 4 months and his house is only 1 month into the listing, then he might consider holding prices firm before even contemplating reducing the asking price.
Valuers are also known to use absorption rates as a determinant of property value when the circumstances make sense.
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