The market time assumption is the number most spec builders never write down before they start.

The absorption rate calculation you are describing is exactly right, and it is one of the places where spec pro formas break most reliably.

For anyone reading who is new to the terms: a pro forma is the projected budget and profit estimate you build before a project starts. Absorption rate is how fast finished homes in a specific area actually sell, usually expressed as months of supply. You calculate it by dividing active listings by the number of sales in the last 30 days. If there are 20 homes listed and 5 sold last month, that is four months of supply. Certificate of occupancy is the official sign-off that the building is complete and legal to occupy, which is the moment your construction loan clock keeps running but revenue has not arrived yet.

The carry cost math in your example is straightforward and worth slowing down on. At 9 percent interest-only on a $600,000 loan, you pay $4,500 a month regardless of whether a buyer exists. Four months of vacancy costs $18,000. If you then cut the price by 2 percent to move the home, that is another $12,000 on a $600,000 sale. Those two items together erase $30,000 that the pro forma assumed was profit, before you count reduced agent commissions on a lower sale price or any carrying costs on the lot itself.

The piece most beginners do not think to ask: absorption rate changes by price band within the same zip code. A submarket might show a healthy two months of supply overall, but the $550,000 to $650,000 band could be sitting at five months. Always pull the closed sale count for your specific price target, not the broader market figure.

What price range are you underwriting to, and have you pulled the band-specific absorption for that range yet?

The cabin outside Branson I almost bought last spring had a pro forma from the seller's agent showing 45-day market time on finished spec homes in Taney County. I pulled Redfin data myself before our second call and the actual median days on market for closed SFR sales in that zip over the prior 90 days was 112. That is not a rounding difference, that is a completely different project. At 9 percent interest only on the construction number they were quoting, that gap was roughly $27k in unmodeled carry before you even got to the price cut conversation. I walked.

The 9 percent figure in your post is actually a little low for what I am seeing on spec construction draws right now in secondary markets. The Columbus lender I talked to in March was quoting 10.25 to 10.75 depending on the builder's track record, and that is for someone who is not a first-timer. So your $4,500 monthly carry example is probably $4,800 to $5,000 in practice, which is not a dramatic difference until you are sitting for five or six months post-CO and the number compounds into a price reduction that wipes half your projected margin. What is the draw schedule on the construction loan you are modeling, because that changes the average outstanding balance and most people calculate carry on the full loan amount from day one, which overstates early months and understates the CO-to-close period where you are actually fully drawn?

The 90-day closed count divided by actives tells you rate, but the number that sets your real carry exposure is median days on market for your specific price tier, not the submarket blend. A market absorbing 1.2 homes per week can look healthy right up until you see that the sub-500k segment clears in 18 days and the 700k bucket sits 94, and if your pro forma lives in that upper tier, the blended absorption number is working against you without showing it. What is the median days on market for closed sales in your price band over the last 90 days?

The 9 percent assumption is on the low side right now for ground-up construction on a spec deal without pre-sales. The bridge and construction money I'm placing in metro Atlanta and Indy right now is clearing 11 to 12 percent all-in once you fold the origination points in, and that's with a borrower who has a track record. So your 4,500 a month becomes closer to 5,500 to 6,000, and a four-month post-CO sit isn't 18k anymore, it's 22 to 24k before you even sneeze at a price cut. The Scottsdale build I funded in 2022 had a 47-day sit that felt like nothing at the time because rates were still low and the buyer pool was deep. That same project starting today would have a materially different risk profile, and I'm not sure the pro forma would have cleared our internal threshold.

What I see when I'm underwriting these is that builders treat the absorption rate as a market fact they can't control, so they just leave it out or round it down, when really it should be one of the first things stress-tested in the model. If absorption slows 30 percent mid-build, which is absolutely what happened in several Atlanta suburbs between Q2 and Q4 last year, your sit time assumption doubles and the equity cushion you thought you had is now covering carry instead of protecting the lender. What price point is your spec targeting, because in my experience absorption curves are extremely non-linear above 700k in secondary markets right now and the 90-day closed count at that tier looks nothing like the broader submarket number.

Maryvale doesn't apply here but I watch Phoenix metro spec activity constantly through the staging work, and what I keep noticing is builders who assume their own comp is the market. They price to the last closed sale in the submarket, build in maybe 30 days of float, and don't clock that the comp they used was already 60 days stale when it closed. So by the time they finish, they're pricing a nine-month-old market. Gilbert and Queen Creek had absorption tighten hard in late 2023 then soften again through mid-2024 in a way that would have wrecked a pro forma written at permit pull. Did you underwrite to current absorption or to the absorption rate from when you did your initial comps?

The misconception worth correcting is that absorption rate alone sets your sit-time exposure: the rate tells you market velocity, but your specific price point and finish level within that submarket can sit two or three times longer than the average if you have over-improved for the street.

On a 600k loan the 4,500 monthly carry figure is right, and the number that actually kills the pro forma is usually the price reduction required after month three, because a 2 percent cut to move the home costs 12,000 on a 600k sale price, which wipes nearly three months of carry savings and compounds the loss on cost basis simultaneously.

What is the median price of the last five closed sales on that street, and how does your projected finished cost per square foot compare to those comps?