Harbaugh Real Estate

What Is Months Supply in Real Estate?

Key Takeaways

a graph of months supply

While this post was originally published in August 2023, I think it helps to revisit it periodically to remind us of a very important factor in our understanding of home prices. In fact, if you didn't look at any other real estate statistic, this single number could tell you where home prices are headed.

What Exactly is Months Supply?

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 continued 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. A high number indicates that there are more homes for sale, while a lower number means fewer homes are available for buyers. Said another way, a higher number means supply is higher, and a lower number means supply is lower. Consequently, the higher the number, the more likely prices will decelerate or even go down, and the lower the number, the more likely prices will move higher.

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 months.

Contextual Meaning of Months Supply

To put Months Supply in proper context, let's take a look at its usefulness as a market indicator.

  1. Buyer's Market: Generally, a higher Months Supply number (typically over 6) 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. In a buyer's market, home prices tend to decline.
  2. Seller's Market: A lower Months Supply number (often under 6) 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. In a seller's market, home prices tend to rise.
  3. Balanced Market: When the Months Supply number is around 5 - 6, it's typically considered a balanced market, neither heavily favoring buyers nor sellers. As of December 2024, the Months Supply in the Dallas/Fort Worth (DFW) housing market was 3.26 according to the Texas A&M Real Estate Research Center. This is still 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 we all remember the market of 2020 and 2021 when Months Supply was 2 or less, and buyers had a difficult time landing deals.

One thing to keep in mind is the Months Supply isn't a perfect indicator of home prices. For example, from March - August 2023, home prices were actually declining slightly in DFW, yet the Months Supply indicator was hanging around 2.0 - 2.5. However, those months of declining home prices were a small blip in the grand scheme of things. Home prices continued moving higher after August 2023, while Months Supply crept up to around 2.5 - 3.0.

Having said that, the last time the Dallas/Fort Worth metroplex saw real declining home prices was in 2010 and 2011. At that time, there were 21 straight months of YoY home price declines, and Months Supply was in the 6.5 - 7.5 range.

Conclusion

To recap, Months Supply is an indicator of home inventory available for sale at a given point in time. Lower Months Supply numbers generally indicate demand exceeding supply, and consequently home prices tend to rise. Higher Months Supply figures indicate supply exceeding demand, and prices tend to decline.

As with nearly all statistics, you should pay attention to Months Supply in the context of other things going on in the marketplace. If Months Supply is decreasing dramatically month after month and mortgage rates are moving lower, that could be a sign that home prices are about to shoot significantly higher. On the other hand, if Months Supply is increasing dramatically month after month and mortgage rates are also moving higher, you can probably expect to see lower home prices in the near future.