Absorption Rate-What does it Mean?

In this changing market, some tools remain for evaluating an area. Read on to better understand the tool we call Absorption Rate.

Real estate methodology has changed over the years. In the “old days” title to property was executed via an abstract. An abstract for a property was like a Cliff Notes version of War and Peace. It was a written record of who owned the property, when they owned it and what was being transferred. Each abstract was a brief history of a variety of people’s lives at it related to a specific property. As ownership of a property changed, the abstract was passed onto the new owner. Then title insurance became more prevalent and abstracts eventually followed the path of the dinosaurs and slowly became extinct.
In a similar vein, the marketing of real estate has experienced a shift in perspective over time. Historically, the three words that characterized real estate were Location! Location! Location! You had your condition and financing, but location ruled supreme in the mind of the consumer. Today, location continues to be a critical element in making a final decision whether or not to purchase a particular property, but location has more to do with emotional appeal and the value aspect of a property.
From a factual standpoint, the two most important words in real estate today may be Absorption Rate! The dictionary defines absorption as to “take in and make part of an existent whole”. In real estate terms it could be defined as “taking in homes for sale and making them part of the inventory of sold properties”. The word rate then represents the amount of time at which absorption occurs.
If one were to analyze specific neighborhoods, communities or geographic areas, the Absorption Rate could be determined for both today and the past. By going through this process, it could be established if the real estate market in those areas is up, down or flat. We use this data to tell if an area has a hot market. The same can be said on a larger scale when looking at the entire real estate market. The National Association of Realtors (NAR) uses Absorption rate to determine whether the market is a buyers' market, a sellers' market or balanced. A balanced market has a 6.0 month absorption rate. Anything higher is a buyers' market. Anything lower is a sellers' market. Please remember that real estate is local, so even within an MLS area, some neighborhoods may be selling like hot cakes while others not so quickly. For neighborhood specific data, ask me or your agent for the latest data!
Therefore, below is a brief overview of listings and sales through February of each year for single family homes in the Metro Denver real estate market. All information is from Metrolist, the area Multiple Listing Service. It shows that we are again near a balance in the overall market.


Active Listings Sales Absorption
Year Listings % Change Sales % Change Rate *
2004 2008 --------- 577 --------- ----------------
2005 1780 -13% 549 - 5% 6.4 Months
2006 2157 +21% 603 +10% 7.0 Months
2007 2211 + 3% 651 + 8% 6.7 Months
2008 2548 +15% 597 - 9% 8.4 Months
2009 1848 -38% 570 - 5% 6.4 Months

· Absorption Rate: Assuming sales activity would remain the same, and no new listings were to come into the market, this is the number of months it would take to “absorb” i.e. sell the entire inventory of new listings for each year.