A windsock tells you the direction and intensity of the wind. Similarly, the absorption rate of real estate is one method to determine how fast homes are selling. Track it over time, and you have a trend. This is a very useful tool that helps real estate agents manage their client’s expectations when listing a home. However, it is important to remember that this is just an estimate and should never be presented as a guarantee of future performance.
This figure is very easy to determine on your own. You only need to know two things – the total number of active listings (homes currently for sale) and the total number of homes that sold over a specific period of time. In our case, Real Market Reports ( http://www.RealMarketReports.com) uses sales over the last 6 months. Therefore divide the total sales by 6 and we have the average number of sales per month.
Now, simply divide the total number of active listings by the average number of sales per month. The result gives an estimate measured in months of how long it would take to sell off the current inventory of listings, if all conditions remained the same. It is significant to mention that this estimate does not take into consideration any additional homes that will come on the market in the future.
For example, if 100 homes sold per month and there are 800 homes currently for sale, then there is an 8 month supply of inventory for this particular market. NOW, explain to the seller that their goal is even more elusive because there most certainly WILL be other homes coming on the market during that period. The only answer is to have their home priced properly for its location and condition.
Absorption Rate: 800 listings / 100 average sales per month = 8 months of inventory
This is a very useful tool which can help you to determine the direction that things are trending. Think of the absorption rate as a “windsock” for the real estate market.