Absorption Rate in Louisville KY
You may have heard about absorption rates in real estate and wondered how this applied to the Greater Louisville KY area. First we need to define Absorption Rate and how Absorption Rate is calculated.
Absorption Rate is the rate at which homes are absorbed into the market. It could also be expressed as the number of months or weeks that it will take to clear the current inventory of real estate listings. A low Absorption Rate would indicate that homes are slow to sell and therefore, slowly absorbed into the market. A high Absorption Rate would be the opposite. The bottom line is that we are weighing supply and demand in the current housing market.
To calculate the Absorption Rate, we would to determine how many active and pending listings are available in a certain area, price range, etc. We use “pendings” as well, because they have not truly closed or “sold” yet. We then need to know how many completed sales were in the last month (or some other time frame). Now we divide the listings available, by the listings sold last month.
In the Fern Creek area, we sold 194 homes in the first 3 months of the year. We have an Absorption Rate of 64.67/month in that time period. Sometimes, Absorption Rate is expressed in months of supply. We had 846 homes to sell at the end of March giving us a 13.1 month supply. (846 homes/64.67 Absorption Rate) This example would be a low Absorption Rate. Keep in mind that this equation does not allow for new homes entering the market.
What about Seller’s market versus Buyer’s market? The old rule of thumb is that we have a seller’s market when we have a high Absorption Rate of 1-4 months. A buyer’s market is from a low Absorption Rate of 7 or more months.
It is easy to get lost in figures. It is best to refine the market numbers to county, market areas, price ranges, type of homes, etc. In the Louisville KY market, the Absorption Rate in Area 4 may vary widely from Area 8. Condo sales in Louisville versus stand-alone homes will be much different with condos having a much lower Absorption Rate. Another look at absorption would be price specific. A $500,000 listing will be on the market for much longer than a $100,000 listing due to the increased number of potential buyers.