What is an Absorption Rate (Real Estate)?

The absorption rate in real estate is defined as the rate in which existing homes sell within a time frame, typically three or six months. This is discovered by dividing the number of houses sold with the available estates. This rate can be used for determining the selling prices for real estate. Absorption rates are also considered by appraisers.

How is an Absorption Rate Used?

The absorption rates only take into account the number of houses available and sold. High absorption rates indicate a potential rise in real estate prices. Likewise, it indicates that sellers have a chance to sell their properties quickly. The marker for high absorption rates is over twenty percent. Adversely when absorption rates fall below fifteen percent, buyers have more room for negotiating as houses are not leaving the market quickly.

Example of Absorption Rate in Real Estate

For example, a suburban city may have one thousand homes for sale. A potential buyer may purchase one hundred houses. If he does, his offer will be depleted in ten months. The absorption rate for this suburban city would then by ten percent. This indicates that half of the market will be sold within five months.

Users of the Absorption Rate in Real Estate 

Realtors often use absorption rate when considering pricing real estate. In a high absorption rate market, a realtor may use this information to justify raising a houses sale price. On the other end, a low absorption rate may be brought to a seller to justify lowering their houses price. Real estate developers use this information to decide where to invest in real estate development. Where absorption rates are high enough, developers can confidently invest in the neighborhood to sustain further development. Once absorption rates begin to drop, investors acknowledge that development is also slowing. Appraisers consider absorption rates when finalizing their real estate value estimates. This practice began in 2009 when federal guidelines regarding Freddie Mac or Fannie Mae loans outlined the need for using absorption rates. When absorption rates are higher, the housing prices are likewise higher. The adverse is also applicable, lower adoption rates equate a lower house value.

Related Topics

• Property Law (Intro)
• Tangible and Intangible property?
• Knowledge Capital
  
• Calculated Intangible Value
• Real and Personal Property?
• Chattel
• Littoral Land
• Fixtures?
• Appurtenance
• Readily Removable Fixtures
• What is ownership?
• Role of Government in ownership of property?
• Allodial System
• Role of property rights in economic activity?
• What are the limitations on property ownership rights?
• What is nuisance?
• What is Zoning?
• What is Eminent Domain?
• Just Compensation
• What is Property Taxation?
• Assessment Ratio
• Millage Rate
• Homeowners Association (HOA)
• Accession?
• Rule of First Possession?
• Lost or Mislaid Items?
• Adverse Possession?
• Encroachment
• Contracts?
• Gift?
• Confusion?
• Establishing and transferring ownership in real property?
• Absolute Title
• Warranty Deed
• Register of Deeds
• Conveyance
• What is a fee simple interest in real property?
• Absolute Interest
• Restrictive Covenant
• What is a life estate in real property?
• What is a leasehold estate in real property?
• What are common types of co-ownership relationships in real property?
• Owning Real Estate Personally vs as LLC
• What if Co-Owners of Real Estate Want Out
• Community Property and Separate Marital Property?
• What is an easement interest in real property?
• What is a license of real or personal property?
• Bundle of Rights
• Absorption Rate
• Fair Housing Act
• Federal Housing Administration (FHA)
• Housing and Urban Development (HUD)
• National Housing Act
• Design Build Contract
• Building Permits
• Certificate of Acceptance
• Construction Surety Bond
• Acquisition, Development, and Construction Loan (ADC)
• Flipping (Real Property)
• Buy, Strip, and Flip
• Homeowner Affordability and Stability Plan
• Building Residual Method
• Accessory Dwelling Unit
• Property Management
• Cost-Plus Contract
• Real Estate Investment Fund
• Listing Agreement
• Property Lawyers
• Multiple Listing Service
• Home Equity
• Register of Deeds
• Title Search
• Opinion of Title
• Certificate of Title
• Abstract of Title
• Chain of Title
• Clear Title
• Cloud on Title
• Defective Title
• Defect of Record
• Action to Quiet Title
• Abeyance
• Encumbrance
• Affidavit of Title
• Warranty of Title
• Title Insurance
• American Land Title Association (ALTA)
• Earnest Money
• Private Mortgage Insurance
• Closing (Property)
• Settlement Statement
• Real Estate Settlement Procedure Act (RESPA)
• HUD-1 Form
• Closing Statement
• Closing Costs
• Buying Real Estate as an LLC
• What is a mortgage?
• What are the Rights of a Mortgage Holder?
• Deed of Trust or Security Deed?
• Trust Deed
• Certificate of Release
• Judicial Foreclosure
• Lis Pendens
• Deficiency Judgment
  
• Short Sale 
• Homeowners Protection Act
• Deed in Lieu of Foreclosure
• Tax Deed
• Tenancy at Will 
• Closed End Lease Definition
• One Percent Rule
  
• Net Lease
• Triple Net Lease (NNN)
• True Lease Definition
• Land Lease Option
• Hell or High Water Contract
• Habendum Clause
• Attornment
• Implied Warranty of Habitability
• Emblements Definition
• Co-Tenancy Clause
  
• What is a bailment?
• Consignment
• Unilateral-benefit and mutual benefit bailments?