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The Monthly Absorption Rate as Measure of Housing Market Health

November 24, 2010  |  by Jonathan Miller

Many tend to rely on market statistics that can be too one sided or give an incomplete picture as to the “health” of a housing market. One of the metrics I like to look at to gauge how the market is doing is called the rate of absorption—the number of months to sell all active inventory at the current pace of sales. It addresses supply (active inventory) and demand (number of sales) in one calculation [active inventory/number of sales].

Since the beginning of (real estate market) time, it has been said that a housing market with a 6 month absorption rate (dotted line) was considered “normal” or balanced. As the chart shows, both markets have not seen a whole lot of “normal” for the past decade. Time to jot down a few notes because the 6-month rule is not an entirely accurate rule-of-thumb.

In fact, when it comes to housing markets, the only rule-of-thumb I place much faith in is that there is no rule-of-thumb for housing because it is always changing.

For this analysis I took a look at the last decade of housing absorption in the Washington DC-Baltimore regional market that MRIS serves and compared it to the US existing home sale absorption rate published by the National Association of Realtors. As evidenced from the chart our region (blue line) is different from the national housing market (orange line). There is no a national housing market but thats for another post.

The dotted line represents 6 month rule of thumb and surprisingly, the markets in first half of the decade moved faster than the “norm” and moved slower in the second half of the decade. A few other observations:

– The Washington DC-Baltimore regional housing market was more efficient than the US housing market in the first five years of this decade, able to absorb more units (relative to its size).
– Both housing markets came together as the market began to cool in 2006.
– After the expiration of the federal housing tax credit stimulus program last April 2010, the Washington DC-Baltimore region is edging out the US market in terms of health (aka efficiency).

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