What does Months of Inventory Mean? How do You Calculate it? And Why Does it Matter?

If you are a real estate investor or buyer, you have probably heard the term “months of inventory” thrown around. It is an important metric used to evaluate the current state of the real estate market. It can also help you determine whether it is a buyer’s market or seller’s market. In this article, I’ll will explain what months of inventory means, how to calculate it, and why it matters.

What is Months of Inventory?

Months of inventory (AKA “absorption rate”) is a fancy term that measures how long it would take to sell all the homes currently on the market in a particular area, based on the current rate of sales and assuming no new listings come on the market.

This metric is all about supply and demand in real estate, and it can tell you a lot about the current state of the market. When there are more months of inventory, it typically means that buyers have the upper hand, as there are more homes available than buyers looking to purchase them. On the other hand, when there are fewer months of inventory, it suggests that sellers have the advantage, as there are more buyers looking to buy than homes available for sale.

It’s a handy metric to know whether you’re a buyer, seller, or investor in the real estate market, as it can help you understand the market conditions, pricing trends, and property values.

How to Calculate Months of Inventory?

Calculating months of inventory is relatively simple. To determine the number of months of inventory, you need to divide the number of homes currently listed for sale by the number of homes sold in the previous month.

Months of inventory = (number of homes currently for sale) / (number of homes sold the previous month)

For example, if there are 200 homes for sale in a given market, and 50 homes sold in the previous month, the months of inventory would be calculated as follows:

200 / 50 = 4 Months of inventory

In this example, there are four months of inventory in the given market. This means that it would take four months to sell all the homes currently listed for sale in the market, assuming no new listings are added, and sales continue at the current rate.

Why Does Months of Inventory Matter?

The months of inventory metric is an essential tool for real estate professionals, buyers and sellers because it provides valuable information about the current state of the market. Here are some reasons why months of inventory matter:

1. Helps Determine Market Conditions: Months of inventory can help you determine whether the market is in favour of buyers or sellers. A high number of months of inventory suggests a buyer’s market, while a low number indicates a seller’s market.
2. Helps Determine Price Trends: The months of inventory can also help you determine the direction of the market’s prices. In a buyer’s market with high inventory levels, prices tend to fall as sellers become more desperate to sell. Conversely, in a seller’s market with low inventory levels, prices tend to rise as buyers compete for scarce listings.
3. Helps With Property Valuation: Knowing the months of inventory in a particular market can help you determine the fair market value of a property. A high number of months of inventory suggests that the property may be overpriced, while a low number indicates that the property may be underpriced.
4. Helps With Timing: Understanding the months of inventory in a market can help you time your real estate transactions. In a buyer’s market, you may want to wait for inventory levels to rise before making a purchase. Conversely, in a seller’s market, you may want to act quickly to secure a property before it sells.

FAQs:

1. What is a healthy months of inventory? A healthy months of inventory depends on the market and can vary. Typically, a balanced market has around 4 – 6 months of inventory.
2. What is a buyer’s market? A buyer’s market is a market condition where there are more homes available for sale than there are buyers looking to purchase them. This condition typically results in lower prices, longer time on the market, and more negotiating power for buyers. Typically a buyer’s market is 6 or more months of inventory.
3. What is a seller’s market? A seller’s market is a market condition where there are more buyers looking to purchase homes than there are homes available for sale. This condition often leads to higher prices, shorter time on the market, and more negotiating power for sellers. Typically a seller’s market is 4 or less months of inventory.
4. Can months of inventory vary by location? Yes, months of inventory can vary significantly depending on the location and type of property. For example, the months of inventory for a luxury home in a particular area may be much higher than the months of inventory for a starter home in the same market.

Conclusion:

In a nutshell, understanding months of inventory is crucial for anyone involved in real estate, whether you’re a pro or just looking to buy or sell a property. This metric tells you how many months it would take to sell all the homes currently available for sale in a particular area, and it can give you a clear picture of the market conditions, pricing trends, and property values. All of this is essential in choosing the right pricing strategy for sellers, and the best offer price for buyers.

By keeping an eye on the months of inventory, you can make informed decisions about when and where to make your move in the real estate game. It’s like having a secret weapon that can help you get the best deal possible.

If you have any further questions or concerns about local real estate, please feel free to reach out to me. I am always here to help and I would be happy to answer any questions you may have. Whether you are looking to buy, sell, or invest, I am here to provide you with the information and support you need. So, if you need any help or guidance, please contact me anytime.