Is it a Buyer’s Market or a Seller’s Market?
As we all know there are several metrics that are used to assess the health of the real estate market. We analyze price trends, the number of “Days On Market” (DOM), inventory levels and several others; they all provide us valuable insight.
However, one very key metric that is not well understood and often misunderstood is "Months Supply of Inventory" (MSI). MSI is a much more insightful metric compared to just “Inventory” because it involves the relationship between the current inventory and the level of activity in the market.
So, what is MSI and how is it calculated?
MSI is a number quantifies the number of months it would take to sell the existing inventory of homes if no new properties were listed for sale, based on the current sales pace. It provides an indication of whether the market favors buyers or sellers.
Here's how MSI is calculated: Determine the total number of active listings on the market and divide that number by the average number of monthly sales.
For example, if there are 500 active listings in a given geographical area and the average number of properties sold per month is 100, then the MSI would be calculated as 500 listings / 100 sales = 5 months.
So, how do we interpretate the MSI number; is five months a seller’s Market or a buyer’s Market?
A low MSI (generally less than 4 months) indicates a seller's market. This means that there is limited inventory available relative to buyer demand. Sellers have the advantage in negotiations as buyers face more competition and may need to act quickly to secure a property.
A high MSI (above 6 months) suggests a buyer's market. There is an excess supply of properties relative to buyer demand. Buyers have more choices, negotiating power, and the luxury of taking their time to make decisions. In this market, sellers may need to adjust their pricing and marketing strategies to attract buyers.
In a Balanced Market (4-6 months), the MSI indicates that the supply of homes is reasonably matched with buyer demand, offering a relatively equal footing for buyers and sellers. Prices and sales activity tend to remain stable in this scenario.
So, it seems pretty straight forward…right? Well, yes and maybe. We now understand that a low MSI is a seller’s market and a high MSI is a buyer’s market, but in which direction is the market heading? If we compare and graph the MSI over a given period of time, it can provide us with some valuable insight.
Fortunately for us, both the National Association of Realtors (NAR) and the Florida Association of Realtors (FAR) calculate and publish these numbers every month. Let’s look at the MSI for all types of properties (single family homes, condos and townhomes) in Charlotte County, FL below:
As we can see, from April 2021 through February 2022, the MSI was pretty consistent hovering around one month. However, in March of 2022, just when the Federal Reserve started raising the interest rates to combat inflation, the MSI began to rise.
In retrospect, it all makes sense. Sellers were making huge profits, often there were bidding wars between Buyers resulting in sale prices that were higher than the listing prices and homes went under contract in record times.
Now with a MSI approaching 4.5, we are in a much more balanced market. It’s taking a little longer for properties to go under contract, sale prices are leveling out and we’re not seeing the bidding wars that we sawback in 2021 and early 2022.
So, instead of just asking, “what’s the inventory like”, it is much more insightful to ask, what is the MSI and is it trending up or down?