Market Dynamics and Statistics

What is Absorption Rate and Inventory Depletion?

"Absorption Rate" means the average number of homes sold per month over a specific period of time. That's it, and there is nothing more complex about it.

Absorption Rate may be applied to a market as a whole, or to a particular price range, such as
$200,000 to $250,000, for example.

"Inventory Depletion" is just a fancy way of saying how long it will take the homes that are on the market to sell.

"Absorption Rate" and "Inventory Depletion" are the best means of tracking market performance. They are usually used to indicate "overall market performance", or how an entire market is doing.

How Absorption Rate is figured out:

I could have used the word "calculated" instead of "figured out", but that might have suggested higher math, which always seems to create a mental barrier. The only math used to figure out absorption rates is division, and it is purely elementary school stuff.

Here's the math: to determine Absorption Rates, the number of homes sold is divided by the number of months.

Below are some examples of calculating Absorption Rates

   * If 24 homes sell in 3 months, the monthly Absorption Rate is 8. (24 divided by 3)
   * If 24 homes sell in 6 months, the monthly Absorption Rate is 4. (24 divided by 6)
   * If 24 homes sell in 12 months, the monthly Absorption Rate is 2. (24 divided by 12)

How Inventory Depletion is figured out:

Once the Absorption Rate is calculated, we use this figure to take a "snap shot' of "Inventory Depletion", or in other words, how long it will take the homes that are on the market to sell.

Here's the math: to determine the Inventory Depletion, the number of current inventory divided by the Absorption Rate.

Below are some examples of calculating Inventory Depletion

   * If there are 12 homes on the market and the monthly Absorption Rate is 2, there are 6 months of inventory. In other words, it will take 6 months to sell or "deplete" these 12 houses at the rate of the current market performance.
    * If there are 24 homes on the market and the monthly Absorption Rate is 6, there are 4 months of inventory. In other words, it will take 4 months to sell or "deplete" these 24 houses at the rate of the current market performance.
   * If there are 24 homes on the market and the monthly Absorption Rate is 2, there are 12 months of inventory. In other words, it will take 12 months to sell or "deplete" these 24 houses at the rate of the current market performance.

Why are Absorption Rate and Inventory Depletion calculations Important?

Absorption Rate and Inventory Depletion provide a truthful projection of the competition in the marketplace by providing accurate figures of supply and demand. It is also an indication if the local real estate market is a "Seller's Market" or a "Buyer's Market" which help Buyers and Sellers create a strategy when approaching a Real Estate Transaction.

When Inventory Depletion is five to six months, this is considered a healthy amount of inventory or a "Neutral Market".

Anything less than five months is considered a "Seller's Market" due to a low/shortage of inventory and constant demand which can contribute to a higher amount of competition in the market place that increases price. Additionally, the lower the Inventory Depletion, the faster properties are selling.

Conversely, an Inventory Depletion of more than six months is considered a "Buyer's Market" due to a constant or increasing inventory and a decrease in demand with the competition being scarce and the price will likely go down. The higher the Inventory Depletion, the longer it will take to sell a property.

In the Inventory Depletion examples above, the first one is an example of a "Neutral Market" (5-6 months of inventory). The second example is a "Seller's Market" (4 months of inventory). The last example is one of a "Buyer's Market" (12 months of inventory).

By calculating Absorption Rates and Inventory Depletion, it helps to have a better understanding of current, and sometimes, coming trends in the Las Vegas Valley area.

What does Absorption Rate and Inventory Depletion mean to a Seller?

Absorption Rate and Inventory Depletion help a Seller to better understand how long it might take a home to sell. They also help a Seller better understand his or her pricing strategy.

The most desirable home in a price range always sells first. If a Seller wants to sell quicker, they want to have the most desirable home in a price range... even if that is one price range lower.

What does Absorption Rate and Inventory Depletion mean to a Buyer?

Absorption Rate and Inventory Depletion help a Buyer to best understand market supply and demand. They can also help a Buyer with his or her offering strategy.

The longer a home has been on the market, and the more competition that it has in its price range, suggests a lower offering strategy, and a greater possibility of increased reduction off list price.

Market Dynamics and Statistics