Months Of Supply And How It Is Calculated

Months of supply expresses how long it would take to sell the current inventory at the recent rate of sales. It is a ratio of stock to flow, and both parts move independently.

The arithmetic

Active listings are divided by the number of sales in a period, usually a month, giving a figure expressed in months.

The measure assumes no further listings arrive and that the sales pace continues, neither of which is true, so it describes current conditions rather than predicting an outcome.

Because it combines two moving quantities, the same figure can arise from very different situations: high inventory with steady sales, or moderate inventory with slow sales.

Which sales pace is used

Using a single month's sales makes the measure volatile, since sales are seasonal and a slow month produces an alarming figure without anything having changed.

Averaging over several months or using a seasonally adjusted rate smooths this, and different publishers make different choices.

Comparing a figure calculated one way against a figure calculated another produces a difference that is entirely methodological rather than a change in the market itself.

Publishers usually document the choice in a methodology note, and reading that note is the difference between comparing two markets and comparing two formulas.

What counts as inventory

Definitions of active inventory vary. Listings under contract, pending sales, coming-soon listings and new construction may or may not be included.

Homes withheld from listing, whether by owners waiting or by builders releasing in phases, are not counted even though they represent potential supply.

Rental inventory is measured differently again, typically through vacancy rates rather than months of supply, since the transactions being counted are leases rather than sales.

Interpreting the number

The measure describes the balance between what is available and what is being absorbed, which is why it is often used as shorthand for market balance.

Conventional thresholds distinguishing buyer-favorable from seller-favorable conditions are rules of thumb rather than defined standards, and they differ between property types and regions.

A figure calculated for an entire metropolitan area also averages across submarkets that may be in quite different positions from one another.

Price segments behave differently within the same area as well, so an overall figure can sit comfortably in the middle while the segments beneath it diverge sharply.

Where the figure comes from

Local listing services, trade associations and government agencies each publish inventory and sales data, using their own definitions and coverage.

A licensed agent or an appraiser working in a specific submarket can produce the calculation for the relevant segment and explain which convention the source used.