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What Are Months Of Supply?

By
Real Estate Agent with Compass Florida, LLC 3262760

In real estate the term “months of supply” is often used by agents and journalists to describe the health or outlook in a particular market.  The term expresses the amount of time it would take for current inventory to be sold without new inventory coming to market.  It is the #1 metric used in our business.  Here is all you need to know about months of supply. 

How To Calculate Months Of Supply

Months of Supply is calculated by dividing the number of homes / condos currently for sale by the average number of homes sold per month.  The average number of homes / condos sold per month is calculated by dividing the total number of home / condos sold in the past 12 months.

An example using just single family homes:  In Palmetto Bay, there have been 327 homes sales in the past 12 months.  Here are the steps to finding the months of supply for Palmetto Bay homes.

(1)  327 / 12 = 27.25  [ Number of homes sold in past 12 months divided by the number of months in a calendar year] This number is also referred to as the per month absorption rate.

(2) 145 / 27.25 = 5.27 [Number of homes currently on the market divided by the average number of homes sold per month.

Result:  In Palmetto Bay there are currently 5.27 months of supply of homes.

What Does Month Of Supply Mean?  

Generally, six to nine months of supply are considered to be indicative of a balanced real estate market.  When the number of months of supply fall outside of the range of 6 to 9 months, the result is what is referred to as a “buyer’s market” or a “seller’s market“.

Is That All? 

Of course not!  When it comes to numbers and real estate sales, agents can go on forever with different figures to indicate trends.  All those numbers can become daunting, and let’s face it 75.6% of people reading this stopped when they read “divide” for the first time in this post.

What are the most important indicators of sales trends and numbers you should ask your agent for when requesting detailed market information? Ask for the supply calculations over shorter periods of time within particular price brackets.  This is because the sales trends for a home at one price range will be different from those in another.

For example, using Palmetto Bay homes once again:  Let’s say you want to know the most up to date sales trends for homes within the $400,000 to $600,000 range (a common price range for homes in Palmetto Bay) because you are considering listing your home for sale.

The best calculation to give you an idea of what to expect as a seller is the absorption rate.  Above, I described the per month absorption rate.  To calculate the absorption rate, take the number of homes sold in a month for a particular area and divide it by the number of homes listed for sale at the end of the same month.

In Palmetto Bay, 165 homes sold in the 12 period of January 2016 to January 2017 for between $400,000 and $600,000.  Currently  there are 57 homes on the market in that price range.  Based on closed sales in January 2017, the months of supply are:

165 (total sales for 12 month period Jan. 16 – Jan. 17) / 12 months = 13.75% absorption rate.

57 (homes currently listed between $400,000 – $600,000) / 13.75 (absorption rate) = 4.14.

As of February 2017, there are 4 months of supply for homes in the $400,000 – $600,000 price range.

The Bottom Line

Whether you are a buyer or a seller, having the latest months of supply figures can better help you in making real estate decisions.  The absorption rate has an effect on value (price per square foot) and knowing how the market is trending will better equip you to price your home right for a successful sale or to make the right offer based on the current market when buying property.

For more visit http://adrianfoley.com/2017/02/08/months-of-supply/  If you live in Palmetto Bay you can see what your home is worth in today's market.  

 

Vern Eaton
Askov, MN
Realtor 651-674-7449

We are now using weeks of supply in my area.  Inventory at a very low level

Mar 24, 2017 05:08 AM
Adrian Foley

Weeks of supply!?  Wow.  How long has your market been using that metric for?  Are you finding it helps motivate sellers to list their property? - Thanks for reading.  

Mar 24, 2017 05:11 AM
Roy Kelley
Retired - Gaithersburg, MD

This is good information to share with prospective home sellers and home buyers.

Mar 24, 2017 08:24 AM
Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Adrian, great post, and this is a question we do get a lot, and can be confusing.  Welcome to ActiveRain! 

Mar 24, 2017 11:07 AM
Adrian Foley

Thank you Joan.


 

Mar 24, 2017 11:53 AM