Yes, absorption is the correct term for Sponge Bob’s ability to soak up water and the same holds true in the real estate industry. In real estate, the absorption rate is the amount of time, generally expressed in months, that it will take a market to “absorb” the current inventory based on recent history. In other industries, this measurement may be called turnover rate or simply weeks or months of supply.
As I’m sure most of you know, Kate and I have a background in retail where you live and die by turnover rate. If the inventory is turning too fast, you’re going to run out of stock and have empty shelves; too slow and it’s time to pull out the red pen and take a mark down!
In real estate, you often hear references to it being a Buyer’s Market or a Seller’s Market. The National Association of REALTORs suggests that a market is in balance when there is a 7-9 month absorption rate. When inventory is six months or less – it’s a seller’s market as there is more demand than inventory. Homes sell quickly and for close to or sometimes above list price. When the months of supply exceed 9 months, it’s considered a buyer’s market. Homes take longer to sell and the list price sales price ratio slides.
How do you figure the absorption rate? It’s a simple formula:
Inventory ÷ # Units Sold x Time = Absorption Rate
For example, if the market you are evaluating (subset) has 12 homes on the market and 6 homes sold in the past six months, the absorption rate would be 12 months.
The key is to understand the subset. In New Albany, there are many subsets, defined by price, neighborhood, age, location etc. Remember, real estate is local…very local. The absorption rate of a $1M brick home has little to do with understanding the market or absorption rate for a $400,000 vinyl sided home in a different neighborhood.
If you are interested in the absorption rate in your neighborhood, try out our free MLS Market Snapshot feature and have a look. Of course you can always drop me an email at firstname.lastname@example.org or call 614-939-1234 and I can run some quick numbers for you.