Absorption rate is a fancy term for sales rate or how long it will take to sell unsold inventory. These days as condo lending pre-sale requirements to close a unit are extremely restrictive (51% sold for FHA, Near 70% sold for Conventional) sales rate is more important than ever in assessing whether a new construction purchase is feasable or a wise investment.
Working with a recent buyer, we uncovered the perfect new construction condo. My client loved the floor plans and finishes. At first look sales looked OK as the project had 100 units total and at our viewing there were 25 under contract. Construction crews were working feverishly while we were there.
Digging deeper however, the picture was not so rosy. A bit of research revealed that at this very time last year, the project had 23 units under contract. So 2 units had been sold in the last 12 months. Running the numbers, this yields a sales rate of .16 units/month, in other words, holding all factors constant it would take 37 years to sell the remaining inventory. Just reaching pre-sales guidelines, let alone, selling out the project would be difficult. Of course many factors could change to influence sales velocity such an improved economic outlook, loosened lending guidelines, price, and incentives, etc.
Finishes and floor plans are important but only if the units will be delivered in a reasonable time frame if ever.
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37 years ! hopefully that prediction will not become a fact, if the units are attractive enough they will be sold, the good thing is that the market is seeing an stable recovery