Absorption rates give you an idea of the supply and demand in a given market for a specific time period. It is easily calculated for a given month by looking at the number of homes for sale and dividing how many actually sold that month.
For example: If there are 5000 homes for sale and 500 sold in one month. The absorption rate would be 10months (5000 divided by 500).
A balanced market (or equilibrium area) is usually considered to be around a 5-7 month absorption rate. Less than that, and it’s moving towards a “seller’s market” where there’s upward pressure on home prices. In other words, there’s more demand than supply. An absorption rate of more than 7 months is moving towards a “buyer’s market”, where there’s downward pressure on home prices. The other main factor on the effect of home values is the number of distressed properties in a market.