Real Estate Calculations
How do you calculate the real estate absorption rate or months of inventory?
This is calculated by dividing the total number of homes for sale by the total number sold for a given period.
Example Of Absorption Rate Months of Inventory
- Total homes sold in the past 30 days: 20.
- Total amount of homes on the market: 35.
- 20 / 35 = 0.57 or 57% absorption rate.
What is a good absorption rate in real estate?
Realtors, appraisers, and lending institutions use absorption rates to understand market conditions and adjust terms accordingly. An absorption rate above 20% typically signals a seller’s market and an absorption rate below 15% is an indicator of a buyer’s market.
Everything You Need to Know About Months Supply of Inventory
Months Supply of Inventory (MSI) is a calculation that quantifies the relationship between supply and demand in a housing market. If new homes stopped entering the market, how many months would it take to burn through all the currently available homes? MSI answers this question.
The How: MSI is typically calculated by dividing the current month’s inventory figure by a rolling 12-month calculation of pending sales. It’s also possible to use pending monthly, monthly closed, or rolling 12-month closed sales. Still, ShowingTime prefers the rolling 12-month pending sales figure to adjust for seasonality and to retain the forward-looking, predictive nature of pending sales rather than the backward-looking closed sales figure.
The Oops: MSI is often mistaken for an inventory-only related metric. MSI is related to inventory but is not solely informed by inventory, and it speaks to the relationship between inventory and buyer activity. We often field questions about the mysterious relationship between a rising inventory and falling months of supply.
The Beauty: MSI seeks to quantify how long it would take the market (in its current condition) to absorb the entire active inventory. So we can easily see if the market is favouring buyers or sellers. Generally, a balanced market will lie somewhere between four and six months of supply. If MSI is displayed as less than 4.0, sellers have gained asking power. If MSI is above 6.0, buyers have gained negotiation power.