How is “Months of Inventory” calculated?

It’s calculated by taking the current number of “Active” listings in the Multiple Listings System (MLS) divided by the number of Pending listings in the last month. Pending listings means there’s an contract in the works, but the deal hasn’t closed yet.

This can be done by specific area, by price range, by one month or many. Here are the steps to calculate Months of Inventory

For any given price range or area:

1. Find the number of Active listings for a certain unit of time (months, day, year)
2. Find the number of Pending or Current transactions (same duration)
3. Divide the Active listings by the Pending transactions

The result should be the unit of inventory for the duration measured for that specific area or price range

Some economists will take the average number of Pending listings for the last 6 months, or even a year, which creates a less volatile number than the month to month.

Licensed real estate associates pay dues to their Board to access to the MLS.  http://recenter.tamu.edu/data/hs/ is a good location for anyone to go to if they want to see the Months of Inventory trending in Texas.

What does Months of Inventory mean?

If  inventory levels fall between 5 & 7 months, this means the market will be considered balanced.  Housing prices should be stable, perhaps rising slightly, influenced more by inflation than by demand.

When inventory levels exceed 7 months, then the demand for housing is low, and prices are likely to fall.  The high number of homes for sale will create a buyer’s market, allowing buyer’s to dictate price and terms to the majority of sellers if a seller wants to make a deal.

When inventory levels fall below 5 months, sellers have more control over price and terms, often resulting in a more significant rise in housing prices, aka a seller’s market.