How To Calculate Housing Inventory

Housing inventory can help buyers and sellers understand the state of the real estate market. High inventory signifies a slower market, and low inventory means homes sell faster. Understanding how to calculate housing inventory can help you understand the type of market you’re facing.

How Housing Inventory Works

Housing inventory is the total active listings plus pending sales at month end. When inventory is high, there’s less risk of housing prices increasing because there’s less room for bidding wars.

When a seller lists a property, it immediately becomes a part of the housing inventory or available housing for potential real estate buyers. Homes pass through the real estate cycle, affecting inventory levels daily. They increase the inventory when sellers list them and decrease the inventory when the sales close.

Housing prices increase when inventories are low because the housing supply isn’t high enough to cover the demand. Unfortunately, this often causes bidding wars in the real estate market, making it harder for buyers to afford homes.

Buyer’s Vs. Seller’s Market

The housing market can be a buyer’s or seller’s market. A buyer’s market has a larger housing supply than the demand for houses. This is because buyers have their pick of homes, and sellers are often more flexible with their pricing and the terms they’ll accept to sell their homes faster.

In a seller’s market, the seller has the upper hand because there are fewer homes on the housing market than there are buyers. Therefore, in a seller’s market, sellers often get higher prices for their homes and can be picky about who they sell their homes to based on the terms offered.

In a seller’s market, bidding wars often happen, which leads to higher home prices, pricing some buyers out of the market.

What Does ‘Months Supply’ Mean In Real Estate?

The months supply refers to when it is necessary to sell the homes in the current housing inventory at the current sales pace if there are no new listings. This is also known as the absorption rate. It signifies the rate the market will absorb the current inventory.

The average months supply is 4 to 5 months. If the months supply is lower, it’s a seller’s market, and higher signifies a buyer’s market.

How To Calculate Months Of Inventory In Real Estate

To calculate the months of inventory in real estate, use the following calculation:

Available properties for sale  ÷ Number of home sales in past month = Months of inventory

For example, if a town currently has 50 active listings and 10 properties closed last month, that gives you 5 months inventory.

The months of inventory depend on the number of active listings, the state of the housing market and the total number of homes for sale. In addition, the real estate market fluctuates between buyer’s and seller’s markets often, so the months of inventory can also change.

Why Is There Low Inventory Of Homes For Sale?

There are many reasons there is a low inventory of homes for sale, starting with the pandemic. With record low-interest rates and millions of people making lifestyle changes, many have bought new homes or refinanced their existing ones and decided to stay put.

Because mortgage rates were so low and the economy unstable, investors who had the money scooped up the housing inventory that was left and now rent the homes to make a profit. In addition, labor and material costs have skyrocketed, making it harder for builders to keep their traditional pace in building homes.

The low inventory has caused a seller’s market with many bidding wars and higher home prices. Lower housing inventory may continue this trend; however, the demand isn’t as high as before.

How To Find A Home For Sale With Low Inventory

Buying a house in a low inventory market can be difficult, but working with a licensed real estate agent can help. Sometimes it comes down to changing your preferences or being more flexible about your options. A real estate agent can help you see more options and how they fit your budget and needs.

The Bottom Line

Knowing how to calculate housing inventory can help you navigate the real estate market successfully, whether it’s a buyer’s or seller’s market. So if you’re interested in buying a home, apply online today and start your hunt for the perfect home.