The Absorption Rate is the ability of the real estate market to sell off all of the houses that are for sale.
For example, if 100 homes are sold every month and there are 1200 homes for sale then it will take 12 months to sell all of those homes. If there are 2400 homes for sale then the absorption rate will be 24 months or 2 years.
If you would like to sell in 12 months then you need to take the absorption rate into account. In the above scenario with 2400 homes for sale, we know that only 1/2 of them will sell in the next 12 months.
To price a property correctly it would have to be in the lower 50% of the price range for similar properties in order for it to sell in the next 12 months. To sell in the next 6 months it would have to be priced in the lower 25% of the competition.
The absorption rate is an excellent indication of the market and is a great way to follow market trends on a weekly or monthly basis. The graphs below (see links) show the absorption rate over the last year for Single Family Homes as well as Condos individually. You can see from this graph that the inventory levels were at their highest point in December 2008 at 8.6 months for single-family and November 2008 with over 14 months of inventory for condos. While in 2006 they were as low as a 2 week supply at some points in the market. The current absorption rates for both condos as well as single-family homes are on a decline in Feb 2009 which indicates a tightening of the market, this could be a sign that the market may be taking yet another turn should it continue in this direction.