Like any business, real estate has its own vocabulary. For example, we’ve defined earnest money, close of escrow, and risk of loss, to name a few. But as the market continues to shift, one of the terms that is moving to the forefront of discussion is absorption rate—real estate’s way of simplifying the concept of supply and demand.
Simply put, absorption rate describes how many homes are selling compared to the number of homes available at a given time. Specifically, it is measured as the number of months it would take to deplete the current inventory of available homes at the current rate of consumption.
For example, if there are 1,000 homes available for sale and 200 homes were selling each month, the absorption rate would be 5 months, meaning that it would take five months at the current rate to sell all the homes.
We use the absorption rate to define whether a particular market is a seller’s market, a buyer’s market, or a transitional market.
A seller’s market suggest that homes are more in demand allowing sellers to command a greater price for their real estate. By definition, an absorption rate of 5 or below is a seller’s market. Of course, the values are based upon a continuum. Just because the absorption rate is 4.9 (a seller’s market) doesn’t mean that sellers can just “name their price” and buyers will fall into line. Obviously, a 1.0 absorption rate is more indicative of a strong seller’s market whereas a 4.9 is a weak seller’s market.
A buyer’s market is defined as an absorption rate of greater than 7 where there is a bountiful supply of homes on the market and not much activity to consume these homes. The further the value gets from 7, the stronger the buyer’s market and the more likely it is that prices will decline.
A transitional market is defined as an absorption rate between 5 and 7. Transitional markets, also called balanced markets, are those where neither supply nor demand are in excess. You and I might call this a “normal” market.
With these definitions in mind, here’s a view of the current market for Mesa single-family homes for sale.
Available inventory: 1,453 homes
Consumption rate: 593 homes/month
Absorption rate: 2.45 months
By definition, Mesa is in the heart of a seller’s market.
And that would explain the multiple offers, the shortening time on market, and the increasing home values.
Alex Casteel is owner of Casteel Real Estate Professionals, a real estate brokerage serving the communities of Mesa, Arizona, and the Phoenix metropolitan area. Alex is a Certified Distressed Property Expert and earned an MBA from the W. P. Carey School of Business at Arizona State University. 
