What is an Absorption Rate in Real Estate?

“So how’s the market?” Most real estate conversations start off with this question and every real estate agent should be able to answer it easily. A real estate agent can usually tap into their personal experiences working with buyers and sellers but there is actually a simple mathematical formula that can be used to help answer the question in a more quantifiable manner.

In Real Estate, an “Absorption Rate” (also referred to as Months of Supply) is the rate at which homes in a particular market are sold over a specific time period. To calculate absorption rate you take the total number of homes sold in a market area over a set period of time divided by the total number of homes available for sale. 

If we look at the absorption rate for the past 12 months for Essex County, NJ, there were 972 active listings and an average of 554 homes were sold per month. So 972 divided by 554 = 1.75. The absorption rate is 1.75. This can also be explained by saying it would take 1.75 months to sell all of the active inventory on the market. 

The local housing shortage has been getting a lot of press lately and most local residents know that Essex County is in a sellers market but how does this compare to the same period 7 years ago? Looking back to 2014 an average of 360 homes were selling every month and with 2381 active listings the absorption rate was 6.6. This would have been classified as a buyers market. The general guidelines for using absorption rate to determine if we are in a buyers market, sellers market or balanced market are: 

Sellers Market = Less than 3 months of inventory

Balanced Market = 4-6 months worth of inventory

Buyers Market = 7+ months of inventory

As listing agents, we are often asked, should I sell now or should I wait a couple of years to sell? By monitoring the absorption rate trends a real estate agent can anticipate shifts in the local real estate market. Having a data driven approach can help our customers make informed financial decisions.