What Is Months Supply in Real Estate?
Months supply is a measure of the supply of homes on the market at a given point in time.
If you read articles or listen to podcasts about the real estate market, chances are at some point you have heard the term "months supply". But, what exactly is months supply and why is it important?
In a nutshell, months supply refers to the number of houses currently available on the market. The idea is to gauge how long it would take to sell all the existing inventory if no new homes come on the market and the existing sales pace continues unabated. It is a number that is useful for measuring the health and balance of the real estate market, specifically the residential real estate market.
How to Calculate Months Supply
To calculate months supply, you simply divide the current month's inventory by a rolling 12-month average number of sales per month. Mathematically, it is represented as:
Months Supply=Number of Active Listings In That Month/Homes Sold per Month
Let's see an example. Suppose that for the month in question there were 500 listings active and that over the past 12 months the average number of homes sold has been 200 per month. This would produce a months supply of 500/200 or 2.5.
Contextual Meaning of Months Supply
To put months supply in proper context, let's take a look at its usefulness as a market indicator.
- Buyer's Market: Generally, a higher months supply (typically over 6 months) indicates a buyer's market, where conditions are favorable for buyers. Home prices might be more negotiable, and buyers have more options to choose from.
- Seller's Market: A lower months supply (often under 6 months) signifies a seller's market. There may be fewer homes available, and with more buyers than properties, homes can sell quicker and sometimes even above the asking price.
- Balanced Market: When the months supply is around 5-6 months, it's typically considered balanced, neither heavily favoring buyers nor sellers. As of August 23, 2023, the months supply in the DFW housing market is 3.0. This is well below the 6 that most economists consider to be a balanced market. However, for many buyers and sellers, this actually feels a little more like a buyer's market because the last 3 or 4 years have seen a months supply of 2 or less.
Remember, months supply is a snapshot of the market at a specific point in time. Like everything else in real estate, things can vary significantly from month to month and season to season. If you are studying months supply in hopes of understanding your current market , be sure to look at it in the context of many months.