Absorption Rate - Explained
What is an Absorption Rate in Real Estate?
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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.
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