The Headrick-Wagner Report

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An Absorption Rate is the total sales to occur per month. Typically it is derived over a period of 6 or 12 months. (i.e. 60 sales occurred in the past 12 months indicates 5 homes sell per month) The Absorption Rate is 5/month.

The Inventory Level is the relationship between the total number of listings available and the absorption rate.  It is reported in "months supply." (i.e. if there are 10 on the market, and the absorption rate is 5, that results in a 2 months supply of inventory.

This technique is valuable to appraisers and real estate professionals in both macroeconomic and microeconomic situations.  Macro markets may include regions, MSA’s, counties, parishes or individual communities.  Micro markets could include neighborhoods, subdivisions, school districts, property types, and price ranges.

The months supply is an important number, which calculates the inventory of homes available in relation to the number of homes to sell per month. A balanced supply would be 4 to 6 months worth of inventory. Greater than 6 months would be an oversupply, and less than 4 months would be an undersupply. 

Our market studies include Pending Sales.  We believe this data to reflect the most current actions of the real estate market.  Some do not include pendings in their absorption rate analysis and if that is the case, we would then consider an undersupply to be under 4 months, a balanced market to be 4 to 6 months, and an oversupply to be greater than 6 months.

Our Inventory Levels are calculated like this: Take the number of sales to have occurred in past 12 months, add in the current pendings, take that total and divide by 12.  This creates an absorption rate over a 12 month period to remove the seasonal fluctuations that may take place in the marketplace. Once the Absorption Rate is figured, the current total number of listings should be divided into the average monthly sales to create the months supply.

Knowing your area's Absorption Rate and Inventory Level, and its relationship to past trends helps us to predict future trends.  Understanding the Inventory Level, and its relationship to macro (broad) or micro (specific) trends helps to identify if a sub-market is out performing other areas. Understanding the market and where it is headed is part of our job as real estate professionals. It is advised to consistently do the numbers each month, to be able to track a trend.

The basic algebraic formula:

Months Supply = A / [(P+S)/12)]

A=Total # of Active Listings
P =Total # of Pendings
S=Total # of Sales in past 12 months

Months Supply of Inventory (MSI) - What it means?

* Less than 2 Months of supply will place strong pressure on prices upward, that could result in as high as double digit appreciation.
* 3 to 4 Months of supply will place pressure on prices upward, resulting in appreciating values.
* 5 to 6 Months of supply is generally considered a balanced market with little to no fluctuation in value.
* 7 to 8 Months supply is going to result in downward pressure on prices, leading to declining values.
* Over a 9 Month supply is an extreme oversupply, placing strong downward pressure on prices, potentially at a double digit annual rate.

Now you can utilize your own market data that you research and calculate your absorption rate.  Only three simple statistics need to be created from your own custom MLS search – the total number of Active Listings, the number of Pendings and the number of Sales to have occurred in the past year.

You may utilize the output for your marketing materials by printing off the output page.

Your Name or Company Name
Email Address
Telephone Number (Optional)
Report Title
(optional – i.e. Condos with 1st Floor Master Bedrooms in Naperville priced under $400,000)
Enter Number of Active Listings
Enter Number of Pendings (if zero type 0)
Enter Number of Sales in previous 12-month period
Grey Shaded areas are mandatory fields.