An absorption rate is an important factor for both buyers and sellers to consider when either pricing a home for sale or deciding what a reasonable offer would be. It is an analysis of how long it would take to sell the current inventory that is on the market based on the prior months sales. It will tell you if you are in the midst of a sellers’ market, a neutral market or a buyers’ market. If you are in the midst of a sellers market that means there is very little inventory available and many buyers driving prices up. In a sellers market an owner can price their property higher and can expect bidding wars and multiple offers.
Buyers can use the absorption rate to know that they will not be the only buyers interested in the property and that their offer needs to be competitive. Clean offers, cash, quick closing dates all put you at the head of the line.
In New Orleans there are areas that are a very strong sellers’ market, areas that are a buyer’s market and neutral areas. It is a snapshot on a particular day and you can use absorption rates to see what the trend is in an area. It is a moving target.
Four months of inventory or less is a seller’s market, with not enough inventory for the number of buyers. Five to six months of inventory is a neutral market with just enough inventory for the number of buyers and more than six months of inventory is a buyers market with lots of inventory for buyers to chose from. The definition of absorption rate is:
“The rate at which available homes are sold in a specific real estate market during a given time period.”
The first chart is the absorption rate for Orleans Parish where you can see the fluctuations in the market. The second chart is for the Uptown area of New Orleans and you can see an entirely different market in that area.