Absorption rates in real estate are calculations which measure the rate at which available homes are sold in a specific market during a given period. It is a method to analyze market activity by determining how quickly properties are being purchased.
The basic calculation is to divide the number of properties sold during a given period for a defined area like a city or zip code by the total number of properties available for sale during that same period. The given period is usually a month and properties can be total sales or a subset like single family detached homes or condominiums.
The formula for absorption rate is: (Number of Homes Sold / Total Active Listings) * 100. If 50 homes were sold during one month and 200 homes had been on the market during that month, the absorption rate would be 25 percent (50 / 200 = .25 or 25 percent). Another way to view this metric is that the inventory of 200 homes would be sold in four months. Absorption rates above 20 percent have historically on a national level been considered high and denoted a seller’s market. This can lead to fewer homes being available, upward pressure on prices, and lower days on market. Conversely, an absorption rate below fifteen percent nationally often characterizes a buyer’s market with homes being on the market for longer periods to sell and sometimes a downward influence on prices.
But Southern California and Alhambra are unique and different from national averages. This past May, Alhambra’s absorption rate was 30 percent and for January during the beginning of the year, it was 40 percent. During the spring, in the month of March, Alhambra’s absorption rate was 46 percent.
Alhambra has a high absorption rate which means that homes move fairly quickly when listed in our city. The inventory of homes for sale in our city during the past half year sells in roughly three months. Absorption rates show that Alhambra continues to be a popular place to live for reasons such as its proximity to Los Angeles, school system, incorporated status providing its own police and fire departments, parks system, nationally recognized dining establishments, historic neighborhoods, and vibrant citizenry.
Other neighboring cities such as South Pasadena, San Gabriel, and Temple City also present impressive absorption rates above thirty percent for the month of May and demonstrate the drawing power of the incorporated cities of the San Gabriel Valley. In contrast, Los Angeles displayed an absorption rate of 18 percent for month end May. A healthy rate, but not as impressive as the incorporated cities of the western San Gabriel Valley.
The high absorption rates for Alhambra and many of its neighboring cities indicate a competitive market where properties move quickly due to high demand. In other words, demand is outpacing the available inventory. As demand remains high and properties sell quicker, sellers retain a negotiating advantage and may require less negotiation in the selling process. Strong demand often leads to higher prices for homes, potentially producing multiple offers and sales above list price.
The analysis of absorption rates helps real estate agents, lending institutions, appraisers, buyers, and sellers understand market trends and in turn adjust their terms and selling or buying strategies.
Gary Frueholz is a realtor with Engel & Volkers Real Estate, a past member of the Alhambra Planning Commission, a Certified Senior Real Estate Specialist, Certified International Property Specialist, and can be reached at 626-318-9436.
