If you’re in the market to buy or sell a home, or you’re just a real estate junkie at heart, you may have heard the term “months supply” used by real estate agents or the media when discussing the housing market. For example, right now there’s about a 1.4 month supply of homes for sale in King County, and less than a month’s supply in a lot of Seattle neighborhoods. But what does that mean and why does it matter? Believe it or not, the months supply of homes is probably one of the best indicators of what’s going on in the market. But before we get into that, we’ll start by explaining what it is.
The months supply is the measure of how many months it would take for all the homes that are on the market to sell given the current pace of home sales. So, if there are 50 homes on the market, and 10 homes are selling every month, then there is a five month supply of homes. The general rule is that if there is less than a three month supply, it’s a seller’s market; a three-to-six month supply is considered a balanced market; a six-plus month supply shifts into a buyer’s market. It’s all about supply and demand.
It’s no secret that Seattle is in the midst of a seller’s market and competition between buyers is fierce. This often results in bidding wars and homes selling for well over asking price. Last year this helped push prices up by more than 10% in the Seattle area. We all like to see our homes go up in value, but market extremes over the long term can lead to a boom/bust cycle like we saw back in 2006 and 2007. That’s why we’re happy that appreciation this year is expected to slow a little to around 4-6%. Months supply is also supposed to rise, leading us towards a healthier, more balanced housing market.