In real estate, the term absorption rate refers to the average amount of time necessary for real estate to sell after being put on the market. This rate is found by dividing the total number of properties available for sale over a specific time frame by the number of properties sold over the same time frame.
Absorption rates are found by dividing the number or value of available properties by the number or value of individual properties sold within a given time frame. They indicate consumer and investor sentiment and purchasing power with regards to real estate, and can be used to track demand and subsequently the value of real estate investments.
Example: Low interest rates drive investors to invest in real estate rather than other investment vehicles. During the subsequent building boom, 2000 new apartments are constructed across the country every year. Of these apartments, 50 are sold or rented out every month. In this case the monthly absorption rate is 2.5% (2000 / 50) and the annual absorption rate is 30% (2000 / 50 x 12).
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