How to Calculate Inventory Absorption
In the real estate industry, inventory absorption refers to rate at which homes are sold in the market and how long your current inventory will last. You can calculate inventory absorption for different sectors of your inventory by dividing inventory into different groups based on price or location.
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Instructions
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1
Select the subsection of homes for which you wish to find the absorption rate. This could be all of your inventory; it could be homes selling between $100,000 and $200,000; it could be homes in the 12345 and 12346 area codes, etc. The specific subset will depend on what you need the absorption rate for.
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2
Ascertain how many homes from your subsection have been sold in the time period you wish to consider. For example, you may wish to see how many homes sold in the last calendar year, or how many homes sold in the previous 12-month period.
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3
Calculate the number of homes sold per month. If you are using a six-month period and you have sold 18 homes in that six month period, your absorption rate is 18 / 6 = 3 homes per month. If you are using a period shorter than a month, say 15 days, you would multiply the number of homes sold by 2. Note that such a short period of time is not recommended because it would be difficult to reliably find a useful statistic from such a short time frame. This number is your absorption rate.
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4
Calculate your inventory life. Divide your total number of active home listings by the number of homes you sell per month as calculated in Step 3. For example, if you find that, given the subsection of homes and time period you selected, you have sold 8 homes per month out of 72 total listings in that category, your absorption rate is 72 / 8 = 9. This number represents the number of months, on average, that your inventory will last. In other words, you have a 9-month inventory in this example.
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5
Analyze your results. Typically, if you are working with anything more than a 6-month inventory, you are probably in a buyers' market.
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References
- Photo Credit sign. sold. subject to contract image by L. Shat from Fotolia.com
