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Housing’s Misleading Health Indicator

The National Association of Realtors will release its monthly U.S. existing home sales report tomorrow. Among other things, the report includes what’s known as the absorption rate, or how many months it would take to sell all inventory at the current sales pace. This report and the media coverage around it will inevitably provide the well-worn insight that when the rate is less than six months, housing is “healthy.” The current rate is 5.3 months.

After I Googled the phrase “a six month absorption rate is a healthy real estate market,” I found plenty of articles citing this rule of thumb, yet none cited a source. The idea that a market is “healthy” is brokerspeak, and doesn’t refer to anything tangible such as sales, prices or inventory. The six-month benchmark incorrectly indicates that all U.S. markets are the same and infers that a lower absorption rate is better than a higher rate. Based on history, we know this isn’t true.

via Housing’s Misleading Health Indicator – Bloomberg View.

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