Understanding Months of Inventory
Months of inventory is a ratio used to describe available inventory in the housing market. It’s the number of homes listed for sale compared to the average number of homes being sold every month. For example, if your market had 10 homes listed and averaged two sales a month, there would be five months of inventory.
Six months inventory is often cited as a balanced market, but economists consider five to seven months balanced, says Jim Gaines, research economist at the Texas Real Estate Research Center.
At first glance, the Texas housing market is showing two seemingly contradictory trends: strong sales and record low inventory in many metros. You might ask: Don’t you need lots of inventory to generate high sales volume?
The answer, according to Texas Real Estate Research Center research economist Jim Gaines, is that there are plenty of homes selling—they are just selling so fast that only a few homes appear available at any given time.
“A lot of what’s happening is the properties are being sold almost as soon as being listed. And when I say as soon as, I’m talking about the same day or within a week. By the time those properties hit the system, by the time the statistics are calculated and computed, they don’t really show up as listings. They show up as being sales, or at least contracts pending.”
Gaines compared the situation to just-in-time inventory in manufacturing. “You don’t even get a chance to even count it as unsold inventory.”
Most of the metros and secondary markets in Texas are experiencing very high demand for houses. “The demand is being fueled by high employment, very low unemployment, and people moving to the state from out of state and from out of the country,” says Gaines. “That robust migration into the state has slowed down a little bit but it hasn’t stopped.”
Historically low interest rates have made homeownership particularly attractive. “Expected rate increases are not going to be enough to really suppress the demand side of the equation,” he notes.
Gaines says Texas won’t get back to a balanced market until demand falls to match the level of supply, the state adds “magnitudes” of new housing to meet demand, or some combination of the two.
When that happens, the big question is whether prices fall or simply level off.
“Yes, we’ve had very high-level prices achieved, but we don’t see the kind of impact to occur that would necessarily cause those prices to collapse,” Gaines says. “So we think that they’re not necessarily going to collapse, but they may start leveling off. If you’re buying a house today thinking you’re going to get anywhere from 5% to 10% appreciation every year for the next 10 years, forget it.”