What is Absorption?
As noted before, our industry tends to have some terms that may seem to be a bit nebulous and one of those might be “absorption”. Maybe also referred to as absorption rate, this is essentially the homes sales rate for a project. I think the term absorption probably came from the thought as to how fast will the market absorb your offering.
Depending on who you are talking to, the preference might be to refer to this rate as weekly or monthly. I seem to hear the “weekly” rate more from the sales and marketing people, while the financial analyst will tend to refer to the “monthly” rate because cash flows typically break down into months, not weeks. If you hear of a 1.5 weekly absorption rate, the analyst will be putting 6.0 in the monthly cash flow.
The absorption rate is highly dependent on market conditions. But it also seems that absorption rates and projections will vary based on home prices. As an example here in Southern California, an entry level townhome project might have a projected absorption of 8.0 per month, while a high-end luxury home may be 2.0 per month. For most of the other products and prices in between, I think most builder and developers are projecting absorption to be somewhere in the 4.0 to 6.0 per month range.
Another point to remember is that if you have an absorption rate that is quite high, it may be telling you that your prices are too low. If you have that high-end luxury home selling at 8.0 per month, it is likely that prices can be increased. Even though faster sales seem to be a good thing, many times the construction schedule cannot keep pace with the sales. Thus, it could be a good strategy to increase the prices and match the construction pace.
Please feel free to share with us below your comments and questions.