How to Calculate Months of Supply
We use the term “months of supply” in real estate to tell us how much inventory of homes for sale we have on the market. The months of supply is the time it would take for all the current inventory to sell if it all sold at the current rate without new inventory coming on the market.
What does supply mean in real estate?
Supply in real estate is the number of houses listed for sale. These can be existing homes listed for sale or new construction homes. Generally, only those homes listed for sale on the Multiple Listing Service (MLS) are considered as part of the supply. FSBO (For Sale By Owner) properties are harder to catalog and are not considered as part of the supply.
How do you calculate months of supply in real estate?
Months of supply is the number of houses currently for sale divided by the average number of homes sold per month.
Let’s look at a few examples from 2016.
In the past 12 months 139 single family homes sold in the Leavenworth area. If we divide 139 by 12 we get an average of 11.58 homes per month. (Some programs use just the last month’s sales, but averaging the last 12 months better accounts for seasonal variation.) So to get the months of supply we divide the current supply which is 89 homes by 11.58. 
We currently have 7.69 months of supply. 6 months of supply is considered the benchmark for a balanced market. Less than 6 months of supply favors the sellers because there are less choices for the buyer. More than 6 months favors the buyers and leads to lower prices.
We can further break down the months of supply by looking at any subset of the market that we are interested in – price ranges, neighborhood, number of bedrooms, homes with acreage etc. Let’s look at the luxury home market in Leavenworth and Lake Wenatchee. I would consider this to be homes above $600,000. In the past 12 months, 12 homes sold for more than $600,000 or 1 per month. The math is pretty easy on this one. With 19 homes currently for sale, we have 19 months of supply which is a very strong buyers market in the luxury home segment.
How about more modest homes? The bread and butter home sales are in the $200-400,000 range in the Leavenworth market. In the past 12 months, 86 homes sold in this price range or 7.17 per month.
There are currently 41 homes on the market in this price range. If we divide 41 by 7.17 we get 5.7 months of supply which is a pretty balanced market.
The more extreme a buyer’s market (12 months or more of supply) the better a deal the buyer might be able to negotiate. The smaller the inventory (1-2 months of supply) the more likely a seller is to see multiple offers or quickly rising prices. To make the most of this calculation, it’s best to narrow down the category to a search likely used by buyers. Compare lakefront homes to lakefront homes, large houses to large houses, condos to condos.
********************************************************************************************************** Required Disclaimer NOTE: This representation is based in whole or in part on data supplied by the North Central Washington Association of Realtors or its Multiple Listing Service. Neither the Association nor its MLS guarantees or are in any way responsible for its accuracy. Data maintained by the Association or its MLS may not reflect all real estate activity in the Market.
The examples used to calculate supply in this article are from 2016 and do not reflect recent prices or supply in today’s market.
