historic absorption, forecast absorption, and year to balance

4 Replies

When doing market research, what does historic absorption, forecast absorption, and year to balance mean when selecting. a market? Thank you.

Not sure about year to balance - maybe that is a component of the forecast?

Historical is the absorption rate that has taken place.

Forecast is a prediction based on the historical absorption and current/anticipated economic trends.

Absorption rate for a year would be calculated  - number of total sales in a year divided by twelve = monthly absorption rate in prior year (average for the year).

Current months of housing supply is calculated - number of active listings divided by the monthly absorption rate - total number of months the current supply should last

So, 120 sales in the prior year gives you a monthly absorption rate of 10 (120/12).

30 active listings would give you a three month supply (30/10).

A three month supply in most markets would be considered the borderline of balanced and shortage. Most markets consider a 3-6 month supply to be a "balance" of supply and demand. These are subjective terms of course.

If you had a 3 month supply, but everyone just lost their job, then that would change the forecast wouldn't it?

If you had a three month supply, and a new business just opened and people were flooding in, then that might change the forecast too.

If you had a three month supply, and you expect things to continue as they have, then you probably have a three month supply.

Originally posted by @Merritt S. :

Not sure about year to balance - maybe that is a component of the forecast?

Historical is the absorption rate that has taken place.

Forecast is a prediction based on the historical absorption and current/anticipated economic trends.

Absorption rate for a year would be calculated  - number of total sales in a year divided by twelve = monthly absorption rate in prior year (average for the year).

Current months of housing supply is calculated - number of active listings divided by the monthly absorption rate - total number of months the current supply should last

So, 120 sales in the prior year gives you a monthly absorption rate of 10 (120/12).

30 active listings would give you a three month supply (30/10).

A three month supply in most markets would be considered the borderline of balanced and shortage. Most markets consider a 3-6 month supply to be a "balance" of supply and demand. These are subjective terms of course.

If you had a 3 month supply, but everyone just lost their job, then that would change the forecast wouldn't it?

If you had a three month supply, and a new business just opened and people were flooding in, then that might change the forecast too.

If you had a three month supply, and you expect things to continue as they have, then you probably have a three month supply.

 Thank you. So the absorption rate is calculating the housing supply of a market compared to another market?

Originally posted by @Jason Ma:
Originally posted by @Merritt Steinbach:

Not sure about year to balance - maybe that is a component of the forecast?

Historical is the absorption rate that has taken place.

Forecast is a prediction based on the historical absorption and current/anticipated economic trends.

Absorption rate for a year would be calculated  - number of total sales in a year divided by twelve = monthly absorption rate in prior year (average for the year).

Current months of housing supply is calculated - number of active listings divided by the monthly absorption rate - total number of months the current supply should last

So, 120 sales in the prior year gives you a monthly absorption rate of 10 (120/12).

30 active listings would give you a three month supply (30/10).

A three month supply in most markets would be considered the borderline of balanced and shortage. Most markets consider a 3-6 month supply to be a "balance" of supply and demand. These are subjective terms of course.

If you had a 3 month supply, but everyone just lost their job, then that would change the forecast wouldn't it?

If you had a three month supply, and a new business just opened and people were flooding in, then that might change the forecast too.

If you had a three month supply, and you expect things to continue as they have, then you probably have a three month supply.

 Thank you. So the absorption rate is calculating the housing supply of a market compared to another market?

No. Each market has it's own absorption rate. You can calculate what the absorption rate has been, and then use that figure to estimate what it will be, the first is a fact and the second is a projection. You could compare one market to another if you want, and to do so you would have to calculate the absorption rate for each.

Originally posted by @Merritt S. :
Originally posted by @Jason Ma:
Originally posted by @Merritt Steinbach:

Not sure about year to balance - maybe that is a component of the forecast?

Historical is the absorption rate that has taken place.

Forecast is a prediction based on the historical absorption and current/anticipated economic trends.

Absorption rate for a year would be calculated  - number of total sales in a year divided by twelve = monthly absorption rate in prior year (average for the year).

Current months of housing supply is calculated - number of active listings divided by the monthly absorption rate - total number of months the current supply should last

So, 120 sales in the prior year gives you a monthly absorption rate of 10 (120/12).

30 active listings would give you a three month supply (30/10).

A three month supply in most markets would be considered the borderline of balanced and shortage. Most markets consider a 3-6 month supply to be a "balance" of supply and demand. These are subjective terms of course.

If you had a 3 month supply, but everyone just lost their job, then that would change the forecast wouldn't it?

If you had a three month supply, and a new business just opened and people were flooding in, then that might change the forecast too.

If you had a three month supply, and you expect things to continue as they have, then you probably have a three month supply.

 Thank you. So the absorption rate is calculating the housing supply of a market compared to another market?

No. Each market has it's own absorption rate. You can calculate what the absorption rate has been, and then use that figure to estimate what it will be, the first is a fact and the second is a projection. You could compare one market to another if you want, and to do so you would have to calculate the absorption rate for each.

 thank you

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you