In many market updates and real estate articles of how to figure out what is happening in the real estate industry a term comes up many a time over… That term is “Months of inventory”. Today we will explore the meaning of this metric and what its purpose is.
What is Months of Inventory (MOI)?
Months of Inventory is broken down most simply into:
The amount of months of supply of homes if there was no more homes listed to the current supply and relates to the sales pace. To find the MOI it is calculated by using the number of homes sold per month and dividing it by the total number of homes for sale on the last day of the month.
Why Would Anyone Care About The Months of Inventory?
Simply put? SUPPLY & DEMAND. Do you remember back in those boring grade 9 classes where the teacher was on about this? Let’s do a refresher!
There is a balance between any commodity and the price that a market will bear for said commodity. When supply is decreased and more difficult to find, the parties with the supply can command a higher price, as buyers are willing to pay more; alternately if there is a higher supply prices can have a downward pressure as there is more competition among the sellers.
This can affect real estate on a national, provincial, city or even sub-areas in a city.
How Does MOI Affect Home Purchases & Prices?
In a real estate transaction there is generally negotiation and the party with an advantage; aka “BATNA” (Best Alternative To Negotiated Agreement) is often the one that has the market inventory on their side. There are many other parts that may affect a parties’ BATNA as well such as Time, Motivation, etc. but that is a different topic!
Generally speaking if there is more than 6 months of inventory in the market, it is considered a Buyer’s Market. If there is less than 6 months it is considered a Seller’s Market and if it’s floating around the 6 month mark it is considered a balanced market (which usually doesn’t last for long).
If it is in the Seller’s Market territory it can be quite difficult to for a Buyer to negotiate down an asking price of a home and can be even more difficult for inexperienced Buyers in particular. If the market is hot enough, there is zero negotiation for a Buyer to attempt as it is in multiple offers and logic can be tossed out the window for the most part.
There are many different metrics that can be used to figure out what is happening in any given market and there is no silver bullet to answer all. Markets are continually shifting and as mentioned above can change from area to area, along with type of home as well playing a factor.