In the Domus Analytics dashboards, we sometimes use these terms interchangeably, even though what we calculate is actually Months Supply. However, they are actually just two sides of the same coin.
Absorption Rate: The rate at which homes sell in a specific market over a month's time. This is calculated by dividing the number of homes that sold by the total number of homes still active for that month. The higher the absorption rate, the faster homes are selling. For example, if six homes sell in August and 24 homes are active at the end of the month, the absorption rate per month at the end of the month is 6/24 or 25%.
Months Supply of Inventory: The number of months it would take for all the current homes for sale to sell, based on the monthly sales. Five to seven months of supply is considered a balanced market. A lower number means that it's a seller's market, with relatively low available inventory, while a higher number indicates a buyer's market. You can calculate the months of supply by dividing the total number of homes for sale over the number of homes sold in one month. For example, if there are 30 homes for sale but only 10 homes actually sold in a month, there are 3 months of supply left in the market.
Said another way, Absorption Rate is X divided by Y. and Months Supply is Y divided by X. In most markets, agents are used to seeing this metric expressed as a number rather than a percentage, which is why we calculate the Months Supply number. But at a high level, whichever metric you prefer, they both tell the exact same story.