What is the meaning of months of supply?
Months of supply is a number that measures how long it will take the current inventory of houses to be sold. This number is very important in real estate since it will help buyers and sellers to know where the market is heading. In other words, months of supply can be used to see who is in control in a particular market.
A higher month of supply indicates that houses are staying on the market for a long time. This is because the rate at which houses are being sold is very low due to low demand. For this reason, a higher month of supply indicates a buyer’s market.
On the other hand, a lower month of supply indicates that houses are being sold at a higher rate. This indicates a low supply that cannot satisfy the current demand. A low supply creates competition among buyers and this drives prices much higher. For this reason, a lower month of supply indicates a seller’s market.
Another term related to the months of supply is the absorptions rate which measures the percentage at which houses are being sold in a particular market.
>>MORE: Absorption Rate: What Is Absorption Rate?
Example of months of supply
Let’s assume that there are currently 200 homes on the market. If 40 houses are being sold each month, it will take 5 months to sell all houses listed on that market (5×40).
