What Does “Absorption Rate” Mean?

By
Commercial Real Estate Agent with RE/MAX West Realty Inc., Brokerage (Toronto)

 

absorption

What Does “Absorption Rate” Mean?

Ontario Real Estate Source

By Brian Madigan LL.B.       

This is the rate at which homes are being sold on a monthly basis.

It is based on a particular market area. Assume that there are 2,400 homes listed for sale in a particular market. And, we know that 200 homes are sold every month. That means basically that we have a 12 month supply of inventory.

 

The rate is calculated as 200/2,400, or 1/12th, or expressed as a decimal .0833.

 

There are some areas which calculate the relationship somewhat differently. They take current listings at 2,400/200 being the number of current sales. The result is 12, meaning that we have 12 months of inventory.

 

No matter what, and however you seek to compare the two numbers,  it will still take 12 months to get rid of the present inventory.

 

This is a key factor used by real estate developers when they decide to build a condominium or new subdivision

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com

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Rainmaker
287,711
Terri Poehler
Realtor - Coral Springs, FL
Coral Springs Real Estate Agent
Brian, I got our explanation slot better than when our meeting tried to explain it. Thank you.
September 29, 2011 09:07 PM #1
Rainer
95,182
Peter Preston-Thomas
Real Ottawa - Kanata, ON

Hi Brian.  Thanks for the explanation.  I find the number can be deceptive in a market like Ottawa where the market is cyclical and the calculated inventory is on the order of a few months.  Ottawa has seen pretty steady monthly average sales recently.  Over the past 3 years, the average number of sales has ranged from 1,119 per month to 1,322 per month, based on the  the preceeding 12 months. 

Now, as an inventory example, if I look at our active listings at the end of February, 2011, there were 4,006 and the inventory was calculated as 3.4 months.  Intuitively, I know sales are increasing that time of year (not average) and, in fact, history shows now that we sold 5,473  in just the next two months - never mind 4,006 in 3.4 months.  The inventory number was pessimistic and similarly, when you're on the down-slope of the cyclical trend, inventory is optimistic (it actually takes longer than the inventory number indicates.) 

Thus, I find the inventory (or absorption rate) calculated this way can be misleading when there's a reasonable turnover in a cyclical market.  If the inventory numbers were more on the order of 6 to 12 months (as in your example) it would better average out the peaks & valleys of the market and make more sense.

September 29, 2011 11:02 PM #2
Rainmaker
565,924
Chris Smith
Re/Max Chay Realty Inc., Brokerage - New Tecumseth, ON
South Simcoe, Caledon, King, Orangeville Real Esta

This is a term we never used in Real estate twenty years ago, but now seems to be one of the main measures of a market, thanks for the explanation Brian.

October 01, 2011 08:38 PM #3
Rainmaker
516,437
Jill Sackler
Charles Rutenberg Realty Inc. "Said and Done!" - Merrick, NY
Long Island's South Shore Real Estate Agent

I also have to say thanks for that easy to understand explanation and the knowledge that real estate developers use this key piece of information when deciding to build.

October 02, 2011 04:56 PM #4
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