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Months Supply of Inventory | What is it and why it is important?

Tuesday, May 3, 2022   /   by Enrique Castillon

Months Supply of Inventory | What is it and why it is important?

Whether you have been house hunting lately or just browsing Zillow fantasizing with those big beautiful homes that most people can't afford, you have seen how fast houses are selling. This has been a popular topic recently and if you have been following me on social media, you've heard me talk about this deep seller's market we are in. The combination of limited inventory and historically low rates has created rapid home appreciation and a very competitive environment for buyers. There are a number of different ways real estate professionals measure the strength of the market and one of those ways is through months supply of inventory.

 

One of the ways real estate professionals know if we are in a buyer's market or seller's market is through technical measurements like months supply of inventory. If you aren't involved in the real estate world, you have probably never heard of this term before, but that all changes today! Months supply of inventory (also commonly referred to as "months supply of homes for sale") is a figure that takes into account how many houses are currently on the market and how many months it would take to sell all of those homes. It is important to note that the figure uses the number of houses currently on the market and doesn't consider the houses that will be listed throughout the following month. In other words, in a hypothetical situation where no houses are going to be listed, how long will it take to sell the houses currently on the market? That is what months supply of inventory is. On the last day of every month the number of houses that are currently active and pending sale (meaning the house is under contract) is tallied and used to determine the months of supply for the following month.

 

Now that we determined what months supply of inventory is, we can put the measurement into greater context. For instance, what is a 'good' months supply of inventory and what is a 'bad' one? This question depends entirely on your definition of 'good' and 'bad.' If you are a seller or a listing agent, you're going to have a different definition of 'good' and 'bad' than a buyer or a buyer's agent since you're going to be rooting for the months supply of inventory to be as low as possible to get the most out of the house you're selling. For this reason, I am going to refrain from using 'good' or 'bad' when referring to different numbers describing months supply of inventory; instead, I will use the terms 'seller's market' and 'buyer's market.'

 

The National Association of REALTORS considers six months of supply to be associated with moderate appreciation. When there are six months of supply the market is neither a seller's market nor a buyer's market, houses are selling at a moderate rate, buyers are finding the houses they want, and sellers are selling their houses without issues. When months supply of inventory is over six months, we refer to that as a buyer's market. During a buyer's market, there are generally more houses on the market than buyers willing and able to purchase those houses, therefore, houses are sitting on the market for longer periods of times and sellers become more willing to negotiate with lower offers to get their houses sold. On the contrary, when months supply of inventory falls below six months, we refer to that as a seller's market. During a seller's market, there are generally more buyers willing and able to purchase house than houses on the market. A typical seller's market will see lots of multiple offer scenarios on houses priced right and lots of buyers competing for the few houses that are still active on the MLS. As you can imagine, this combination of factors will drive prices up and most sellers will get very favorable terms in their offers and will get full asking price or above asking price for their homes.

Remember the general rule: six months of supply is equilibrium, more than six months supply is a buyer's market, less than six months supply is a seller's market. Obviously when months supply of inventory is below one months supply, it is a deep deep seller's market. Which is why I would be more than happy to help you get top dollar for your house. Although it might seem easy to sell your house as a "For Sale By Owner" most of the time, people don't have the same level of success as when they use a Realtor. Please reach out at anytime. Share this with your friends and family so they too can be aware of what Months Supply of Inventory means and how that relates to the Tucson Market today! Remember, the better informed you are, the more everyone wins! Information is power!

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Tucson, AZ 85718
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