The Importance of Market Absorption & Monthly Supply

Most people who get in touch with an agent about buying or selling a home will be given market information in a packaged Comparable Market Analysis (CMA) and use that information as a be-all, end-all when it comes to the information they use to make a decision in their real estate transaction. Even as a younger agent, I found myself guilty as charged when it comes to the "Standard" set of information that most agents provide to clients and potential customers. Two factors for sellers that are extremely important but not talked about at listing appointments enough are 'Months of Supply' and 'Market Absorption'.

Months of Supply

The term Months of Supply simply refers to how many months it would take for every single home that is currently on the market to sell, given a monthly sales volume. In most markets, four to five months of supply is average and considered a balanced market. A lower number means that buyers are dominating the market and that there are relatively fewer sellers. This lower number would indicate a great seller's market because of the general rule of supply and demand where the supply is low but demand is high. At the same time, a higher number would indicate that we're in more of a buyer's market where the inventory is high and the buyers who are qualified to purchase a home have more options available on the market to choose from. Below is a live graph that is constantly updated every month showing the last 5-6 years of the market's Months of Supply by Parish. 



 

Market Absorption Rate

The absorption rate is the rate at which homes sell in a specific market over a given period of time, usually 6 months to a year. In essence, we take the number of homes that sold in a month and divide it by the number of homes still available for sale. The best analysis for determining the absorption rate can be done by calculating it using a reasonable price range and homes that are within a close square footage range. The higher the absorption rate, the faster that homes are selling within the criteria that we've set! If an absorption rate is above 20%, homes are selling fast and that's generally associated with a seller's market. An absorption rate below 15% is usually an indication of a buyer's market.

For example, if three homes sell in March between $100,000 and $120,000 and 15 are still available for sale at the end of the month, the absorption rate per month at the end of March is 3/15 or 20%. We usually like to prepare customized market absorption analysis for individual clients based on a number of different factors. You can request your own analysis and other market reports HERE!