"Absorption rates are a calculation of how long it will take for all the homes on the market to be sold, or absorbed, based on how many homes are on the market and how many were purchased in the last 30 days." - This is courtesy of blogging legend Theresa Boardman from Minnesota.
Think of it this way - if no more houses were put up for sale, and buyers continued buying at the current pace, the absorption rate is the number of months it would take to sell all the available homes for sale.
Why's this important? Absorption rate is a good indicator of how balanced the market is. Most real estate experts and practicing Realtors agree that a 6 month absorption rate is about 'normal'.
Absorption rate less than 6 months? It's a seller's market. Sellers have the upper hand and are in a position to be choosy about who they sell to, and to demand a little more from buyers: more earnest money, a bigger down payment, a nonrefundable clause for the earnest money, buyer to pay their own closing costs, etc. In extreme sellers' markets like metro Phoenix experienced in late 2005, homes sell in hours or days for significantly more than list price.
Absorption rate more than 6 months? It's a buyer's market. Buyers have time on their side. They can be picky about finding exactly the right house, and take their time making a decision about which house to make an offer on. Buyers can also offer less than asking price and request that the seller pay for negotiables like closing costs and appraisals. In severe buyers' markets (like much of metro Phoenix has been in for recent months) buyers can also ask for seller assistance towards down payments.