As a potential buyer or seller, it’s crucial to comprehend the health of your local real estate market. One of the most important metrics that buyers and sellers should know is called absorption rate, which measures how quickly homes are selling in a particular area.
In this article, we will take an in-depth look at absorption rate - what it is, how to calculate it, why it’s essential to understand when buying or selling a property, and how you can use it to make informed decisions.
What is Absorption Rate?
In simple terms, absorption rate is defined as a measure of how quickly properties are selling in a specific location. Calculating absorption rates requires taking the total number of sold and pending properties for the past six months and dividing by six. Divide this monthly average into total active listings for the location which gives you the absorption rate.
The resulting number provides insights into supply/demand balance, pricing strategies, local trends and ultimately helps impact your purchase or sale decision-making process.
How to Calculate Absorption Rate
Calculating absorption rate within a specific neighborhood or area involves taking an average number of sold and pending properties for the past six months, then dividing that number from the total currently active.
Here’s an example:
If there are 1,500 active listings in Fort Myers over the past six months with 750 sold listings within that time-frame and 200 listing under contract (pending) during that same period. Add up 750 plus 200 equals 950 Divide by six months = 158.3 properties sold per month Divide active listings (1,500) by monthly sales (158.3) = 9.48% absorption rate
This means that if no new houses come onto the market in Fort Myers FL, then all available inventory would sell out within about ten months based on the current absorption rate.
Understanding Absorption Rate
Understanding absorption rate can help buyers and sellers make informed decisions about pricing, marketing strategies, and timing their transaction. Here are the top benefits to keep in mind:
1. Identifying supply and demand
Absorption rate can help identify whether there is more supply than demand or vice versa in a given area. High absorption rates indicate a strain on the supply of the market. Low rates suggest an oversupply of homes on the market.
2. Indicating time to sell properties
Absorption rates provide an estimate of how long inventory will take to sell based on current buying patterns in the area. A higher absorption rate means less time on the market while lower rates suggest longer wait times before finding a buyer.
3. Helping buyers make informed decisions
Buyers can use absorption rate when making purchasing decisions as it gives them an edge during negotiations with sellers/agents if they know what kind of market they’re dealing with beforehand.
For instance, if the absorption rate is high, buyers may need to act fast on property or risk losing it to another buyer. Conversely, in a low-absorption rate market, buyers have more power to negotiate better prices and terms with sellers.
4. Helping sellers price their properties correctly
Home sellers can also use absorption rate when pricing their properties correctly so that they can ensure quick sales at fair prices.
For example, by analyzing the amount of inventory and current buying patterns for the area, sellers can determine whether they should list their property higher or lower than the average asking price depending on whether it’s a buyer’s or seller’s market.
5. Identify Neighborhood Trends
Lastly, absorption rates can identify neighborhood trends as well as larger metro areas that could prove beneficial information for buyers looking for investment opportunities in the Cape Coral -Fort Myers Metro Areas as well as the surrounding Southwest Florida market.
If you’re a buyer looking to purchase a home or an investment property in an up-and-coming neighborhood with a low absorption rate that shows signs of growth based on new housing developments and improved infrastructure, it could be good news for you as demand may increase in the future.
For more information about the Cape Coral-Fort Myers real estate market please feel free to contact me anytime!