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What is a real estate absorption rate?

The term “absorption rate” in real estate, is the rate at which available homes are sold in a specific real estate market during a specific time period; most commonly a month.

The information that you need to know…

  1. The specific time frame in the real estate market
  2. The number of homes sold in that location/area during that specific time frame
  3. The number of homes currently actively for sale right now

How is real estate absorption rate calculated?

Absorption Rate = Average number of sales per month / Total number of available homes still for sale

Facts to Consider when Interpreting Absorption Rate

  1. Does not take into account additional homes that enter the market, private or new home sales not reported to the MLS data being used.
  2. Know the specific numbers when interpreting the absorption rate, such as how many listings expired, how many sold, how many were relisted.
  3. Know the price ranges, as a more accurate absorption rate, can be calculated using property data specific to your home price range.
  4. This absorption rate calculated is usually a generalization of a specific market, but there are outliers and anomalies in every market. For example…
    1. Areas such as Windsor Park, popular mature neighbourhood areas within Edmonton have geographically higher individual absorption rates than the Edmonton average.
    2. Areas such as the downtown condo market, and low-rise and high-rise market across Edmonton is extremely low, with a ton of competing listings and inventory from both developers and resellers.
  5. Need to also consider the months that you are averaging the real estate market absorption rate, and take into account seasonal changes, market conditions, and comparable data of past years.

Information that can be derived from Absorption Rate

  1. How many months it will take for the market to absorb (sell) the supply of homes
  2. An absorption rate over 20% is usually interpreted as a Seller’s market in which properties sell quickly.
    In Edmonton, 2006-2007 & 2013-2014 the absorption rates were some of the highest that the market has seen.
  3. An absorption rate below 15% is usually interpreted as a Buyer’s market in which properties take a lot longer to sell.
    In Edmonton, 2009-2010 & 2018 the absorption rates were some of the lowest that the Edmonton real estate market has seen.

Using an example to explain…

Data:

  1. Timeframe: January 1st to August 31st, 2018 (8 months)
  2. Number of homes sold in the Edmonton real estate market from January 1st to August 31st: 8,505
  3. Number of homes currently active at the end of August 2018: 7,280

Calculations:

Rate of Home Sales = 8505 / 8 = 1,063 Homes have sold per month on average

1,063 / 7,280 = 0.146 = 14.6% absorption rate, meaning 14.6% of the homes currently for sale are estimated to sell in future months (absorbed each month); and,
If no inventory is added to the market, it is assumed that it will take 6.85 months for all inventory to sell (7,280 / 1,063 = 6.85)

Edmonton Real Estate Absorption Rate

Market Conditions For Edmonton Real Estate - Sellers/Balanced/Buyers

Analysis and Comparison to Historical Data

During the same time period in the 2014 Edmonton real estate market, 1,302 homes were sold per month on average. At the end of August 2014, there were only 4,053 homes actively on the market. With an absorption rate of 32.1%, and no new inventory entering the market, all inventory would be sold in just 3 months!

Conclusions made:

Due to different market conditions between in 2014 and 2018, inventory was selling in 2014 in half the time that homes are currently taking in 2018. 2018 has close to double the inventory as the market in 2014.
2014: A Seller’s Market (usually an absorption rate above 20%)
2018: A Buyer’s Market (usually an absorption rate below 15%)
Homes are still selling in 2018, but only the homes priced properly with a better value proposition than the other homes are selling.

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