In residential real estate, the best number to track to understand the current market conditions is months of inventory. Months of inventory is the number of months until all of the homes currently listed for sale are sold per the current rate of sales.
For example, if a particular area has 90 active listings on the market and 30 pending home sales last month in this area, the months of inventory equals 3.
90 active / 30 pending = 3 months of inventory
Now, how does this number determine whether we are in a seller’s, buyer’s or balanced market? A seller’s market is often referred to as a “hot” market, since homes sell quickly. A buyer’s market is known as a “cold” market, because homes will sit on the market for an extended period of time.
The table below breaks down the months of inventory typically associated with each market type.
|Market Type||Months of Inventory|
|Buyer’s (Cold)||More than 6|
|Balanced||3 to 6|
|Seller’s (Hot)||Less than 3|
In most markets, months of inventory vary depending on price range. The higher price ranges tend to sell more slowly than the lower price ranges.
In my market, San Diego County, the real estate market is balanced in the $541,000 to $1.5 ranges. A home listed for more than $1.5M has a much smaller pool of buyers who are actively searching, so the months of inventory is higher. The table below illustrates the months of inventory for each price range in the month of July 2014.
Housing Inventory in San Diego County by Price Range (July 2014)
|Price Range||Months of Inventory|
|$0 – $100,000||4.50|
|$251 – $350,000||2.24|
|$351 – $450,000||2.42|
|$451 – $550,000||2.90|
|$551 – $650,000||3.67|
|$651 – $750,000||3.62|
|$851,000 – $1M||4.85|
|$1M – $1.5M||5.16|
|$1.5 – $2M||6.25|
|$2M – 2.5M||10.00|
|$2.5M – $3M||10.19|
|$3M – $3.5M||19.80|
|$3.5M – $4M||17.60|
|$4M – $4.5M||14.67|
Know Your Numbers
It’s wise to know your numbers when considering purchasing or listing residential real estate. There are many variables for success in buying and selling real estate. Whether you consult a professional or do your own research, one must know the current state of their local real estate market or run the risk of losing time, money or both.