Absorption Rate

One of the simplest ways of assessing the real estate market is to check the absorption rate, often called the months of inventory.

In short, it tells you the pace of home sales (beyond the simpler days on market). It informs you:

  • if you’re buying, whether or not you need to hurry or if you can take your time!
  • if you’re selling, this figure tells you what the odds are of your success in the next month. That could impact your selling strategy.

What is the months of inventory, or the absorption rate?

Water and a faucet - understanding the absorption rateThe absorption rate tells us how quickly the current inventory will be absorbed, or sold off, if sales continue at the same pace and no new inventory were to be added.

The absorption rate could be measured in days, weeks, months,  years, or decades – but the most common is the months of inventory. It’s really two data points in one: the available inventory and the number of sales in a particular period of time.

If this is hard to picture, consider a bathtub. If the tub is draining, how long will it take until the water is gone if the faucet is left off and if water continues to exit the tub at the same rate? That is the pace we are considering for homes for sale.

When homes are selling fast, in 30 days or less, often the data is described as days of inventory rather than weeks or months.

What is a fast absorption rate, and what does that mean for home sellers and buyers?

A balanced rate of sales suggests that neither home sellers or home buyers have a real advantage over the other. In the United States, anywhere from 4 – 6 months is considered balanced. Less than that is a seller’s market, and more than that is a buyer’s market. The lower the number, the hotter the market. 

In Silicon Valley, though, it’s almost never as high as 4 months – though it can and does happen sometimes.

For us, anything under 2 months is a hot market, and anything under 1 month is a super hot seller’s market.

Here’s a graph displaying the absorption rate for houses in Santa Clara County between January 2005 and now. The highest absorption rate was 14.2 in January 2008. It fell quickly from there with the next month at 12.4, then 10.1 in March, and eventually settling in at around 6-7 months of inventory for a period.

 

Absorption rate for Santa Clara County houses Jan 2005 - August 2022

(more…)