In real estate, the absorption rate is the time it would take for all of the available homes for sale to be gobbled up by buyers. Just like all other real estate statistics, it can be calculated based on various criteria be it broad and general, or very specific.
In order to calculate absorption rates for a given set of criteria, you need to know 2 important facts and you need to determine a time frame. For example, if you wanted to know what the absorption rate for a given area is based on a 6 month period, you would do the following.
Take 6 months and turn it into days (180 days.) Using your set of criteria, find out how many homes have sold in a specific area that match that criteria. Now, divide 180 by that number. Let’s say for this example that the number of sold homes in an area is 15. 180/15 = 12.
Now, multiply the number of active homes on the market by this number. In this case, we’ll assume there are 6 homes on the market. 6 * 12 = 72 days. Divide this by 30 and you have the number of months it would take to absorb the currently available homes.
In this case, 2.4 months. Any time the absorption rate is under about 3 months, the seller is in control. Above that, and the buyer tends to have more control. A balanced market occurs at about 3 months.