News > What is Absorption Rate and Why Should You Care?

No, absorption rate in real estate terms is not the same as how much your paper towel picks up or how much a diaper holds. This term is used in real estate to mean how long a property will stay on the market, based on recent comparable sales and how many comparable properties are currently on the market. Though there are two ways to calculate this value, we prefer using the "Months of Inventory" method, which divides the number of current listings by the number of sales for the month. So for example if there are 4000 active listings at any one time, and on average 1000 are selling in one month, then the absorption rate is 4000/1000= 4, meaning it will take 4 months to sell those 4000 listings.

So what's a "good" absorption rate? It depends on if you are a buyer or seller. A market with about 4-5 months of inventory is usually called a balanced market, meaning neither buyer nor seller have a strong advantage in negotiations. Any number above that would signal a buyer's market (buyers have the upper hand in negotiations) and any number below that means it's a seller's market. For the years when the real estate market was tight (2020-2024), absorption rate was very low, often in the 1.5-2.5 month range, and buyers (and their agents) were extremely frustrated with the lack of properties for sale and how quickly they went under contract.

Why is this important for Phoenix Condo Buyers?

Absorption rate can be applied to an entire market as in the example above. But you can also drill down to a more specific market which makes this statistic much more applicable to your specific situation. And for condos, it's much easier to determine what a "market" is because you can just look at absorption rate for a specific condo community (assuming it is large enough). You can't always look at a condo community and assume that if you see a bunch of listings then it must be a buyer's market in that community. Without looking at how many condos sold there recently, you don't know the whole story. For example, for a larger community like Toscana at Desert Ridge, the absorption rate is currently (as of this writing) 6.55 months of inventory. That means that you may have an opportunity to snag a deal in this community as a buyer.

PhoenixCondomania.com calculates the absorption rate for each condo community. From the community page, click the Detailed Analysis of Sold Condos page to see the absorption rate expressed in months of inventory.

Why is this important for Phoenix Condo Sellers?

Absorption rate is equally important for Phoenix condo sellers. If you decide to put your condo on the market when the absorption rate is high, you'll either have to price lower to have it sell quickly, or know you may have to wait a while for a buyer to pick your listing - assuming it is priced properly from the start. If absorption rate is low in your community, you may have the opportunity to price a little higher or can be confident you will find a buyer quicker than usual.

As stated above, you can find the absorption rate for your community on PhoenixCondomania.com. From the community page, click the Detailed Analysis of Sold Condos page to see the absorption rate.

Some caveats to using absorption rate

Luxury markets often have a different absorption rate that signals a balanced market. Often that is above 6 months of inventory, because the buyer pool is smaller.

In Phoenix and Scottsdale, condo buyer activity often picks up in the winter/spring season, because of second home buyers. Because of that, sellers often put their condos and townhomes on the market in January, so you'll often see the absorption rate pop up. This inventory often gets worked down in March and April. on PhoenixCondoMania.com, we take solds from the last 3 months and average them for the calculation so we can smooth any seasonal trend a bit.

And finally, there's a bunch of other factors that can affect pricing decisions and timing when you are selling your Phoenix condo, including location, your upgrades, and inventory at other similar condo communities. As condo experts we can help you determine how to reach your goals, whether you are selling or buying. Contact us to start a conversation!

 

Though not guaranteed, information and statistics in this article have been acquired from sources believed to be reliable.

Related Links

• Phoenix Condo Buyer information
• Phoenix Condo Sellers Guide