Absorption rate reveals market health — but what is it?

In real estate, the absorption rate measures the relationship between supply and demand.

The standard calculation for the absorption rate takes the number of homes that are available and divides that by the number of homes sold over a period of time to determine how long it takes the market to “absorb,” or sell, all the properties. So if there are 100 homes sold per month and there are 1,200 homes on the market, it’s going to take 12 months to sell all of those homes.

Absorption rate is not an exact science, nor do all Realtors use the same methodology. I do not use pending sales in my calculations, meaning I do not add homes that are in various stages of the sale contract process. They are not sold but, technically, they’re not available either. Assuming they do sell, then they will count towards sales. If not, then they will go back into the “available inventory” category.

Why is this a useful tool? Narrowing the absorption rate for a specific neighborhood and even further to a specific price point can assist both sellers and buyers in initially determining the nature of their local market and, if it is a buyer’s or seller’s market, establish their price accordingly. As Chris Sudore mentioned in his article last month, the luxury market (over $2 million) is clearly selling at a slower pace than the market for properties priced under $2 million.

Over the last month you can see from the adjoining chart that there were 26 closed sales in the neighborhoods that we track. As of this writing, there are 45 active listings (in all price points including both condominiums and single family homes).

Without delving deeper into various price points and specific neighborhoods, this tells us that overall we are still very much in a seller’s market with only 1.7 months of inventory, if homes continue to sell at the existing pace. The rule of thumb is that more than six months of inventory tells us that we are in a buyer’s market, a balanced market is considered three to six months of available inventory and a seller’s market is less than three months of inventory on hand.

When I look at year over year comparisons, the median price of sold properties rose a whopping 28 percent, from $725,000 in 2015 to $925,000 over the same period this year, in the neighborhoods that we track. The number of closed sales dropped by 16 percent. In my view, this is and has been a story of scarce inventory in our close-knit and treasured neighborhoods.

As many of you might have seen in the recent Seattle Times article, downtown Seattle now has the most tower cranes of any city in the United States. We are consistently the second-fastest growing housing market but still playing catch up to other West Coast cities like Vancouver, British Columbia, or San Francisco and Los Angeles.

Population growth in Seattle is certain. But what’s less clear is the future status of our transit network – we have a long way to go before we enjoy San Francisco’s BART system, or the subways of larger, better-planned cities.

In the 1960s, our little seaside town was actually slatted for a subway system when the Feds were handing out stimulus money — but we passed. Now we have the fourth worst traffic congestion in the U.S. so it’s no wonder that urban campuses like Amazon, Google and Facebook are choosing downtown Seattle over suburban office parks.

All said, the close proximity and established communities like Madison Park (the “Central Park” of Seattle, in my view) will continue to be a sought after destination given the lack of transit infrastructure, plethora of cultural exchanges and the general “Manhattanization of Seattle” drumbeat. 

LAURA HALLIDAY is a real estate agent with Realogics Sotheby's International who specializes in premier residential real estate in Broadmoor, Madison Park, Laurelhurst, Lake Washington, Denny Blaine, Seward Park, Capitol Hill and Montlake. She can be reached at 206-399-5842.