MONTHS’ SUPPLY OF INVENTORY VS. ABSORPTION RATE
2020 turned our lives upside down, altered real estate trends, and resulted in a sellers’ market that will be hard to forget. The last time REIN recorded inventory numbers this low was back in 2004!
The phrases ‘Months’ Supply of Inventory’ and ‘Absorption Rate’ are sometimes used interchangeably, but they are actually quite different. This concept can often confuse consumers who are trying to understand how these numbers affect their buying or selling process. So, let’s break it down.
Absorption Rate per Month is the average number of listings that have sold within the last 12 months.
- Absorption Rate = Total number of listings sold in the last 12 months divided by 12 months.
Months’ Supply of Inventory is the number of months it would take under the current Absorption Rate to sell all properties actively on the market depleting us of all available inventory.
- Months’ Supply of Inventory = Total number active listings divided by the current Absorption Rate.
The city of Chesapeake’s months’ supply of inventory experienced the highest percentage change (-57.46%) from 2.28 months in December 2019 to just 0.97 in December 2020, the lowest in all of the region’s seven major cities. Suffolk, however, had the highest months’ supply in Hampton Roads for December 2020 at 1.82 months. Over the course of the last year, Norfolk saw the lowest percentage of change and currently remains steady at 1.58 months. In December 2019, Virginia Beach had the lowest months’ supply in our region at 1.91 months, but recorded 1.07 in December 2020, just a tad higher than Chesapeake.
So what does all of this mean? The months’ supply of inventory tracks the health of the market. The magic number for a balanced market is six months. Anything above six is considered a Buyer’s market. This means there is more inventory for buyers to see, and they drive the price. Anything below six is considered a Seller’s market, which means there is a lower amount of inventory, and the sellers drive the price.
*Disclaimer: Numbers are comparing December 2019 to December 2020 and the percentage of change.
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