Rate of Absorption, or ROA, is how long it takes for the current inventory of homes on the market to sell. In most markets, five to seven months is considered a balanced ROA; a "seller's market" is considered to take less time than this, while a "buyer's market" takes longer.

Knowing ROA and inventory trends are not just fun facts to tell your clients and dinner party guests. This number will help you price smarter, make better offers (or reject poor offers), advertise more effectively, and give you something impressive and useful to share with your clients.

To calculate a current rate of absorption: Divide 12 (months in a year) by the number of sold homes in the past year. This reveals how long it takes a home to sell in that market. For example, if last year's sales total 700 then
12 / 700 = .017... it takes .017 months for a home to sell.

Multiply this result by the homes currently on the market. For example, say you find 250 homes currently for sale, then multiple 250 x .017 = 4.25... meaning your Rate of Absorption is 4.25 months.

If the absorption rate is in decline, the near-term market will face greater competition from homebuyers, and you should be aggressive at deal-making. If the absorption rate goes up, you'll want to get proactive about selling efficiently.

According to REALTOR® Magazine, "the right price depends in large part on the current absorption rate in your market." Tracking ROA and sharing it with seller and buyer prospects will help them in their decision-making processes.

Source: Investopedia