Definition of Absorption Rate:
Absorption Rate in Orange County:
The rate at which available homes are sold in the Orange County Housing Market - during a specified time period. It can be easily calculated by dividing the total number of available homes in this market by the average number of sales in the month. The figure will show exactly how many months it will take to get rid of the supply of the homes on the housing market. A high absorption rate usually indicates that the supply of available homes will diminish quickly – this means that the homeowner will likely sell a piece of property in a shorter period of time (a good thing).
Here is a good working example:
If 9 homes sell in September for between $600,000 – $800,000 and 30 are still for sale in the Newport Beach Market at that price range on September 30, the absorption rate is 9/30, or 30%. If 1 home sells and 15 remain, the absorption rate is 1/15th, or 6%. The absorption rate is the inverse of the number months of supply of homes in an area: a 20% absorption rate is equivalent to five months of supply, and a 50% absorption rate is equivalent to two months of supply. An absorption rate above 20% has traditionally been associated with a seller's market, meaning homes are selling fast and the number of months of supply is low; below 15% has been associated with a buyer's market, meaning homes are selling relatively slowly and the number of months of supply is higher. The Newport Beach real estate market is hyper-sensitive to supply and demand functions.