What Is Months Supply?
Months supply is a key metric in real estate economics that quantifies the number of months it would take for the current inventory of homes on the market to sell, given the current sales pace. It is a vital economic indicator used to assess the balance between housing supply and demand in a given geographic area or market. A higher months supply suggests an oversupply of homes relative to buyer demand, typically indicating a buyer's market, while a lower months supply points to a shortage of homes, favoring sellers.
History and Origin
The concept of months supply, particularly in the context of the housing market, has evolved with the increasing availability and sophistication of real estate data. Organizations like the National Association of Realtors (NAR) began systematically tracking and reporting metrics such as inventory levels and months supply in the late 1990s, with data publicly available from 1999 onward.7,6 This consistent data collection has allowed economists, analysts, and market participants to better understand market dynamics and observe trends over time. Early uses of this metric helped to quantify market balance and identify periods of significant oversupply or undersupply. Historically, a six-month supply has been widely considered to represent a market in equilibrium, where neither buyers nor sellers have a significant advantage.5
Key Takeaways
- Months supply measures how long it would take to sell all currently available homes at the prevailing sales rate.
- It serves as a critical indicator of the balance between housing inventory and demand in the real estate market.
- A low months supply typically suggests a seller's market, while a high months supply indicates a buyer's market.
- The metric is calculated by dividing the total number of homes for sale by the average monthly sales volume.
- Changes in months supply can provide insights into potential shifts in property values and market conditions.
Formula and Calculation
The formula for months supply is straightforward:
For example, to calculate the months supply for a given period, one would take the total number of active residential listings (housing inventory) at the end of that period and divide it by the average number of closed sales (sales volume) over a recent timeframe, typically the last month or a trailing 12-month average.
Interpreting the Months Supply
Interpreting the months supply requires understanding what different values signify within the real estate market. A months supply figure of approximately four to six months is generally considered a balanced market, indicating stable housing prices and relatively equal leverage between buyers and sellers.4
If the months supply falls significantly below this range (e.g., two to three months), it signals a strong seller's market. In such conditions, demand outstrips supply, leading to increased competition among buyers, potentially resulting in bidding wars and upward pressure on housing prices. Conversely, a months supply exceeding six or seven months suggests a buyer's market, where there is an abundance of available homes relative to the number of interested buyers. This scenario often leads to longer marketing times for properties and a greater likelihood of price reductions as sellers compete for a smaller pool of purchasers. Understanding market equilibrium is crucial for accurate interpretation.
Hypothetical Example
Imagine a local housing market at the end of July. There are 1,200 active homes for sale. Over the past month, 200 homes were sold.
To calculate the months supply:
Number of Homes For Sale = 1,200
Average Number of Homes Sold Per Month = 200
In this hypothetical example, the months supply is 6 months. This figure suggests that the market is in a state of market equilibrium, where the rate of sales would deplete the current inventory in six months if no new homes were listed. This scenario indicates a relatively balanced market, providing insights for both real estate professionals and prospective homeowners.
Practical Applications
Months supply is a critical metric with practical applications across various facets of the real estate and financial sectors. Real estate agents and brokers use it to gauge market conditions, advise clients on pricing strategies, and set expectations for sales timelines. For potential homebuyers and sellers, understanding the current months supply helps them navigate the competitive landscape and make informed decisions about property values.
Lenders and financial institutions monitor months supply as an indicator of market health and potential risks associated with loan portfolios. A rapidly increasing months supply could signal a weakening market, potentially impacting mortgage rates and lending standards. Furthermore, economic analysts and policymakers often use months supply data, such as that provided by the Federal Reserve Bank of St. Louis, to assess broader economic cycles and housing market trends.3 This data contributes to overall market analysis and economic forecasting. For instance, reports from Reuters often highlight months supply figures when discussing global housing trends and their impact on local economies.2
Limitations and Criticisms
While months supply is a widely used and valuable metric, it has several limitations and faces certain criticisms. One key limitation is that it provides a snapshot of the market at a specific point in time and does not always account for nuances in market segmentation. For example, a high overall months supply might mask a severe shortage in a specific price range or property type, such as starter homes, while luxury homes sit on the market longer.
Another criticism is that the calculation can be influenced by how "homes sold" is defined (e.g., pending vs. closed sales) and the period over which "average sales" is calculated. Some analyses suggest that focusing solely on supply constraints might be misleading, as other factors like income growth can significantly influence housing prices. Research from the Federal Reserve Bank of San Francisco indicates that rising incomes may be a more significant driver of housing price growth than supply constraints in some U.S. cities, challenging the prevailing view that easing housing supply constraints alone will yield anticipated improvements in housing affordability.1 This highlights that market analysis must consider a broader range of economic indicators beyond just months supply. The metric also does not inherently account for changes in housing demand or the impact of mortgage rates on buyer behavior, which can quickly alter the market balance.
Months Supply vs. Housing Inventory
Months supply and housing inventory are closely related but distinct concepts in real estate. Housing inventory refers to the total number of homes currently listed for sale at a given moment in time. It is a raw count of available properties, representing the absolute volume of housing stock.
In contrast, months supply takes that housing inventory figure and contextualizes it by comparing it to the current sales pace. It answers the question: "How long would it take to sell all the current housing inventory if no new homes came onto the market, based on how quickly homes are currently selling?" Thus, while housing inventory provides a static measure of availability, months supply offers a dynamic view of market balance, reflecting the relationship between the supply of homes and the rate of buyer absorption. The distinction is crucial for understanding whether the sheer number of homes for sale represents an oversupply or undersupply given existing demand.
FAQs
What does a high months supply mean for the housing market?
A high months supply indicates a buyer's market, meaning there are more homes for sale than buyers, leading to less competition among buyers, potentially lower housing prices, and longer selling times for properties.
What is considered a healthy months supply?
Generally, a months supply of four to six months is considered a balanced market. This range suggests that there's enough inventory to meet demand without creating excessive pressure on either buyers or sellers.
How does months supply affect housing prices?
A low months supply typically puts upward pressure on housing prices due to strong competition among buyers for limited homes. Conversely, a high months supply tends to lead to downward pressure on prices as sellers may need to reduce asking prices to attract buyers.
Is months supply relevant for all types of real estate?
While months supply is most commonly discussed in residential real estate, the underlying principle of comparing inventory to sales velocity can be applied to other segments, such as commercial real estate or even various product markets, to gauge supply and demand dynamics.
Can months supply predict future market trends?
Months supply is a backward-looking metric, reflecting current conditions based on past sales. However, significant changes or sustained trends in months supply can provide strong indications of future market direction, influencing buyer and seller behavior and contributing to economic forecasting.
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