How To Calculate Housing Inventory

4 Min Read
Updated July 6, 2023
Written By
Miranda Crace
Frame of a house being newly constructed.

Housing inventory can help buyers and sellers understand the state of the real estate market. High inventory signifies a slower market, while low inventory means homes sell faster. Understanding how to calculate housing inventory can help you understand the type of market you’re facing and determine when it’s a good time to buy a house.

How Housing Inventory Works

Housing inventory is the total number of active listings plus pending sales at the end of the month.

Homes pass through the real estate cycle and affect inventory levels daily. When a seller lists a property, it immediately becomes available housing for potential real estate buyers, and housing inventory increases. When sales close, housing inventory decreases.

High inventory can lower the risk of housing prices increasing. Housing costs may rise when inventory is low because the housing supply doesn’t meet buyer demand for homes. Unfortunately, this scenario can cause bidding wars in the real estate market and make 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. In a buyer’s market, the housing supply exceeds the demand for houses, so buyers have their pick of homes. To sell their homes faster, sellers are often more flexible with their pricing and the terms they’ll accept.

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 usually sell their homes at higher prices and can be picky about who they sell their homes to based on the offered terms. Bidding wars may occur in a seller’s market, which typically leads to higher home sale prices, pricing some buyers out of the market entirely.

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What Does ‘Months’ Supply’ Mean In Real Estate?

The months’ supply measures how many months it’d take to sell all the homes in the current housing inventory if there are no new listings or changes in the current sales pace. This is also known as the absorption rate because it signifies the rate at which the market will absorb existing homes in the current inventory.

The average months’ supply is 4 – 5 months, which indicates a balanced market. If the months’ supply is lower, it’s a seller’s market. A higher number of months of supply 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 on the last day of the month ∕ Number of home sales in the past month = Months of inventory

For example, if a town currently has 50 active listings and 10 properties closed last month, that’s 5 months of inventory (50 ∕ 10 = 5).

Why Is There A Low Inventory Of Homes For Sale?

Housing inventory is low for many reasons, and one of the reasons is the pandemic. With record low interest rates and millions of people making lifestyle changes, many people bought new homes or refinanced their existing homes and decided to stay put.

Many real estate investors took advantage of the low mortgage rates and unstable economy to scoop up the remaining housing inventory and rent the homes to make a profit. At the same time, the cost of labor and materials skyrocketed, making it harder for builders to maintain their traditional pace of new home construction.

The low inventory led to a seller’s market, bidding wars and higher home prices. Lower housing inventory may continue this trend – but 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 show you more options that can fit your budget and needs.

The Bottom Line

Whether it’s a buyer’s or seller’s market, knowing how to calculate housing inventory can help you successfully navigate the real estate market. If you’re interested in beginning your home buying journey, and start your search for the perfect home.

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