What are “Months of Inventory” and How Will It Affect My Real Estate Transaction?

Months of Inventory in real estate is defined as the amount of time (or months) it would take for all current MLS listings to sell given that no new listings enter the market.

This is calculated by dividing the total number of homes for sale by the total number of homes sold for a given period of time – usually done on a monthly basis. Months of Inventory = Total Units on Market in Month X / Total Units Sold in Month X

For example, if there were 3,000 listings on Denver’s MLS in August and 1,000 of those sold by the last day of the month, then there would be three months of inventory – as long 1,000 homes were to sell in both the following Sept. and Oct. and 1,000 new listings entered the market to replace those that were sold. However, the likelihood of identical sales activity and market listings from one month to the next is very low. This calculation is typically updated on the last day of every month.

Generally, the greater the months of inventory or supply, the more sellers there are than buyers – also known as a buyer's market. On the other hand, the lower the months of supply is, the more buyers there are than sellers and market conditions would more so be in sellers’ territory.

What do buyers’ and sellers’ markets mean anyways, and how do they relate to months of inventory/supply in real estate?

When there are considerably more MLS® listings available than buyers, average benchmark price gains tend to slow to a halt – if not decline – as competition between sellers increases and some are willing to drop the price to get the transaction done.

Also, realistically speaking, don’t expect your home to sell overnight in such market conditions. It may take several weeks or months to sell your home. However, you may have to adjust your price expectations to do so successfully (but not always).

When there are fewer MLS® listings available and substantially more buyers looking to make a move, average benchmark prices tend to gain ground as sellers now may receive several offers for their homes.

As a seller, you’ll want to consult a local, professional and experienced real estate agent for a competitive market analysis to maximize the listing price comparative to other similar properties for sale.

Also, consider doing a little work on curb appeal, putting some effort into staging and following other home seller tips to create that little extra appeal in showings – it could result in an offer you can’t refuse!

As a buyer, you’ll also want to ask your agent how to navigate an offer properly on a home that may receive a handful from other prospective buyers. Be ready to act quickly and make a reasonable offer as there is no time to waste, which includes being pre-approved for a mortgage and having the rest of your finances sorted.

Months of inventory in real estate can affect home prices due to basic market principles. Remember:

·        When months of inventory are low (2 or lower), the market is usually in sellers’ territory

·        When months of inventory are high (4 or higher), the market is generally in buyers’ territory

·        Months of inventory between 2 to 4 are typically considered “balanced” more or less

Think back to high school or college, where you may have learned that when there is more of something on the market, its value typically drops because it is plentiful. The demand for a product can affect how much of it is available (or vice versa), affecting the price.

For example, when home listings are plenty, potential buyers may view multiple properties before making an offer to a seller which has received only a few bids. That seller may be forced to consider those offers depending on their real estate goals.

Meanwhile, when home listings are scarce, potential buyers will have to act quickly and make an offer they think will compete with those from other buyers. The seller may have several offers to consider, and the highest one usually wins.