How Does “Months Of Inventory” Work?

by HomeSmith Team

In my opinion, the all important metric that drives prices and market behavior more than anything else is “months of inventory.” What does that mean? Well, they say a market needs about 6 months of inventory to be at equilibrium. More than that is a buyer’s market, and less than that is a seller’s market.

On a more practical level, relatively speaking, 6 months of inventory implies approximately 1 seller per every 1 buyer that needs a home. If you have, say, 3 months of inventory then that would be 2 buyers for every 1 seller. One month of inventory, then in theory that would be approximately 6 buyers for every 1 needed seller. 0.5 months of inventory would be 12 buyers for every 1 seller, etc., etc.

Now leaving the theoretical world, Travis and Williamson County ended the year at below 0.4 months of inventory! I’m sure it’s happened in other places before, but it’s unheard of here. If you have a higher volume realtor that’s out there, part of the fray every day, they can probably tell you some crazy stories from 2021 so far. To help paint a picture, think about a school dance with more than a dozen guys to every one girl. How intensely would those guys fight over each girl present? And the most popular girls even more! Now imagine that imbalanced dance is instead something as important as a home, that keeps you warm and the rain off your head. That home is also your ticket into your preferred school and a social community. Imagine what some people would be willing to do in THAT kind of dog fight. THAT is the reason this year has started with a large portion of the houses in prized areas selling for 25-50k over list price, almost as a new norm.

Now if you want some more unpacking of how months of inventory works, here’s a quick explanation of how it’s calculated:

Take the average # home sales over 12 months, divided by 12 months.

Ex: 6200 total sales / 12 = 516.66 avg sales per month

Then divide the current number of active listings by that average sales per month.

Ex: 3300 active listings / 516.66 = 6.39 months of inventory