Last Updated on April 1, 2024

What is Absorption in Real Estate? | Real Estate Definition

By Alan F Macdonald

What is Absorption in Real Estate? | Real Estate Definition

What is Absorption?

In real estate, absorption is the percentage of homes sold compared to the number of homes listed for sale over a certain period of time in a specific area.

Absorption = [Number of homes sold] / [number of homes listed]

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    For example, if 1267 houses were for sale in Edmonton in the month of May, and 858 of those houses sold, the absorption would be calculated as: 858/1267 – or 67.7%.

    Absorption = 858 homes sold / 1267 homes listed = 67.7%

    Real Estate Agent Explains Absorption Rate

    Not all houses are that are listed for sale are sold. That means that some houses are not priced properly for whatever reason or that there aren’t any people out there willing or able to buy them. Absorption shows how well priced properties are and how capable or willing people are to buy those properties. Higher absorption means a hotter real estate market, lower absorption means a cooler real estate market.

    Related to absorption, the absorption rate is the time it would take for all the homes currently listed to sell if no new homes went up for sale. Often expressed in months, it is a key factor economists use, but it doesn’t make much sense to the average person. The absorption, however is a percentage and requires less in the way of points of reference, so it becomes a great way to explain the market situation to a buyer or seller. Two neighbourhoods can easily be compared using absorption because it requires very little data to come up with a value.

    Why Does It Matter?

    Along with buyer willingness and desirability, absorption is used as simple indicator of the demand for real estate. Absorption can show how popular an area is with buyers. The higher the popularity or demand, the higher the absorption would be, translating into higher real estate prices for the area. As such, it can be an important metric for buyers, sellers and their realtors to consider.