Absorption RateThis metric is widely used in the homes-for-sale market and it refers to the number of units sold over a particular period. Most often a per month absorption rate is calculated. This can be done by recording the number of units sold each month or by using the number of sales over a period (quarter, six months, year) and diving by the number of months contained in that period. For example, if in a market we have data indicating that during the previous quarter 600 units were sold, then we can calculate the per month absorption rate as: AR = 600/3 =200 units per month So in essence this indicator is a measure of housing demand. This metric is often used by property professionals to estimate the so called month’s supply, which refers to the number of months that it would take to absorb the current inventory of homes for sale, if current absorption rates were to continue unchanged. This is calculated by simply dividing the number of units that are for sale over the monthly AR: Months Supply = Number of homes for Sale/Monthly AR
Month’s supply = 5,000/250 = 20 months Such estimates though need to be viewed with great caution since they assume that demand in the next 20 months will be exactly the same as the demand in the last 12 months. This is hardly the case in reality, as demand for homes is influenced by a number of factors that fluctuate through time, such as prices, economic conditions, expectations, demographic structures of population, mortgage rates, etc.
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