Market Absorption: Using the Year-End Trend Indicator

By Diane Ives

MRIS, April 21, 2008–Wouldn’t it be nice if you had another market statistics tool in your real estate tool belt? “Absorption rate analysis” gives us the answer to the age-old question, “how many homes are being absorbed by the market on a monthly basis?”From www.mris.com homepage, click on News, then Market Statistics, find Year-End Real Estate Trend Indicator, select the desired Report type and County, click Generate and Print the report. Use the back arrow one time, click on Monthly Real Estate Trend Indicator, choose Report type, County, and Month, click Generate, and Print the report. For the purpose of this exercise, print December 2007 and January 2008.

First, let’s figure out how many homes sold in 2007:

For today’s example, let’s determine that we are going to look at residential sales (but not condo/coop or ground rent). Using the Year-End Sales Report for 2007, find the price range that you are interested in. You may need to use a ruler but let your eye look to the right. In the section titled “Residential Unit Sales Number of Bedrooms,” look in the first three columns (2 or less, 3, 4 or more bedrooms). Discover the number of sales from each column and add those together. That represents the total number of homes sold last year in the selected price range. Divide by 12 to find the average number of homes sold per month.

Now, look at the December 2007 Real Estate Trend Indicator. Find the price range that you are studying, look in the column called Active Listings, find the number of Residential Listings (in the same price range). How many listings were available at the end of December 2007? Divide that number by the average number of listings sold per month during 2007 and you will discover the number of months of inventory in existence.

Now, if you look ahead to the January 2008 Real Estate Trend Indicator. Using the same price range, add the number of sold properties (2 or less, 3, 4 or more Bedrooms) together. Is the number holding up to the average you calculated earlier?

Recapping, the formulas for doing the calculations to determine average number of homes sold per month and number of months’ worth of inventory are:

- Total number of homes sold in price range divided by 12, equals the average number of homes sold per month;

- Number of Active homes divided by the Average number of homes sold per month equals the number of months’ worth of inventory.

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