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What is Absorption Rate and what is its influence in the Property Market?
Essentially a Property Market tool, Absorption Rate refers to the rate at which homes are sold in the market. It is given by homes sold divided by the total number of houses available in the market.
Absorption cost shows the demand for houses in the market apart from showing whether there is an ample number of homes in a given market over a specific period of time. The reverse of absorption rate shows the required and probable time it would take to get the houses sold in the market completely. In accounting, businesses use the absorption rate to find the overhead costs.
A high absorption rate shows that homeowners are increasingly interested in selling their homes. A rate of 20% or more is known as seller's market where houses get sold fast while a rate of 15% shows slow home-sale and known as buyer's market.
The absorption rate does not consider the additional sale of houses in the current period as its purpose is to calculate the rate of sale before the new data arrives.
Influence in the Property Market
Absorption rate influences the property market and property dealers are the ones who are most interested in the rates. In the case of a low rate, the properties need to be sold at a lower price while the prices may increase when the rate is high.
Property developers get an idea of whether new homes should be built from the absorption rate. If the rate is high, it is a green signal for the home builder to build more homes whereas a low rate indicates there are sufficient homes in the market and there is no need for additional homes.
The absorption rate is used by Appraisers to adjust the prices of real estate properties. In case there is high demand the rates go up and hence appraisers increase the price of homes. However, when the rate is low, the appraisers need to reduce the prices.
Uses in Accounting
Businesses use the absorption rate to calculate overhead costs. Total budgeted overhead costs divided by the total budgeted product base give the overhead costs of the companies.It needs to be revised at the end of the accounting period to adjust the actual costs to the business.
Example
Say there are 200 homes in a neighborhood and 100 homes get sold monthly in the area. The absorption rate therefore will be 20% (Houses sold / total number of houses). Alternately, the houses built will last for 2 months (total houses/ houses sold).
Points to Note
Absorption rates show the rate of sale of properties.
Absorption rate is used in the property market extensively.
The reverse of absorption cost shows the time it would take to get the houses sold completely.
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