Buyers and sellers may wonder "how important is inventory when buying and selling?" Agent know that it is VERY important (well, most do...some seem to not pay much attention). In more formal circles we refer to it as absorption or absorption rate, i.e., how much time will it take for the current inventory to disappear (be absorbed) at the current rate of sales, if nothing new comes on the market. 

Absorption rate provides a good indicator of how fast homes are selling, and is used, in a general sort of way, to classify the type of market - buyer's, seller's, or stable. There is plenty of discussion around what classifies a market as a buyer's market, for example. In some sense it may not really even matter what you call it - understanding the inventory, generally and specifically, and your competition as a seller is likely much more valuable. The point, though, is the amount of inventory is a good indicator of supply and demand and this can affect your decision to buy, and perhaps more importantly, to sell.  

Buyers certainly realize that they have lots of choices, or limited choices in their home searches, and this may cause them to act more quickly when choices are limited. And when there is lots of inventory there is a tendency to want to see it all. If homes are not selling quickly there is the perception that there is no rush. Not always the case, however. 

So why should you consider what the absorption might be and what it means?

And how might you look at it so it is most meaningful?

First, let take a look at some information I pulled from the San Diego MLS for the La Costa area 92009 in the Carlsbad real estate market as illustration, at the end of June 2009. Here we consider only detached homes (otherwise known as single family homes in our real estate lingo). While some people use 1 month as the period of time, I learned to use 3, or even 6, months in my CRS class, which makes more sense because of how the sale volume can shift in a short period such as 1 month. 

ACTIVE on market = 162 homes

SOLD in 3 months = 109, or an average of 36 per month.

ABSORPTION = 90 days/109 homes sold in 90 days X INVENTORY  = 134 days or 4.5 months 

Or another way to calculate it: 

# ACTIVE / AVERAGE # SOLD per month over 3 months = 162 / 36  =  4.5 months 

In other words, 109 homes sold in 3 months, at a rate of 1 every .82 days (or 36 per month). With 162 to sell, it will take 4.5 months to sell the current inventory. That's pretty darn good in this market, with some areas of the country having inventory of well more than a year, and higher. 

So what does that mean for sellers? Well, for one, with this rate of absorption they have a 22% chance of selling in the next 30 days, barely 1 out of 5 chances. So while 1 of 5 homes will likely sell in the next month, 4 out of 5 will not. Hmm. Could be important to know in terms of positioning a home to sell. 

But let's drill down to another level - price range. Generally homes in different price ranges sell at different rates because of supply and demand. So you will likely find a different level of competition (more homes, or fewer) in the price range your home is in, and thus a different inventory level. And this may have a significant impact on what you can reasonably expect as a seller, on average.

Here are the data for the La Costa real estate market (92009) at the end of June 2009. 

What's interesting to note are the differences across the price ranges in inventory - the number of available homes - and how quickly they are selling. Take, for example, the $700 - 800K range compared to the $800 - 900K range. Both have about the same number of homes for sale, but the higher price range has a much faster absorption rate. Thus sellers have a far better chance of selling in 30 days than those in the lower range. 

Of course all this is based on averages, and various factors (condition, location) can impact sales time, but the results are telling.

Could this not be of tremendous value when talking with potential sellers about what is going on in the market in order to decide how to position their home for sale effectively?

I suspect if one looks at other parameters, such as new vs. resale, or within certain specific areas, those results could also be enlightening. 

I'm not an economist, nor a statistician. And I don't have a crystal ball. But I keep learning more about the value of looking at and understanding absorption rate, and talking with buyers and sellers about why they should care.

I invite others here in AR to share their thoughts as well in terms of how it can and should be used. We can all learn from each other, and markets can vary so much. And there are different perspectives on these issues as well.