Inventory: What You Should Know About The Hottest Topic in Real Estate Right Now

Is it a buyer’s or seller’s market? How can you tell?

Reports toward the end of last year indicated that inventory nationwide was decreasing, signaling that the country is entering a seller’s market. HousingWire reported that “the national inventory of homes for sale fell 2.5% from the previous year, and at a much faster rate of decline compared to August’s 1.8% decrease.”

Of course, the market varies depending on where you are in the country. Cities like Boise, Idaho and Tucson, Arizona are among the hottest real estate markets in the United States. These cities are entering what is known as a “seller’s market” – while places like Seattle and San Francisco are edging closer to a buyer’s market. Here’s what those terms mean and how you can tell whether your specific location is a buyer or seller’s market.

Buyer’s v. Seller’s Market

A buyer’s market is the term used when there are more homes on the market than buyers seeking to purchase. Buyers have more homes to choose from, which increases the odds that a buyer will find their perfect home. When they find that perfect home, they’ll have less competition for it, which could help them avoid a bidding war,” writes The Balance.

A seller’s market, on the other hand, means there are more buyers than houses available. Homes don’t stay on the market for long, and buyers are willing to pay more than the listed price to get the home of their dreams.

There are ways to determine whether we’re in a buyer or seller’s market. If you see many for sale signs that stay up for months on end, it might indicate that there aren’t many sales being closed. Or, if you see people putting up for sale signs only to take them down a week later, you’re probably in a seller’s market. There are more precise ways to look into market trends: starting with evaluating real estate data from MLS.

Months Supply of Inventory

Inventory levels can tell you a lot about the real estate market. “Months Supply of Inventory” is a key data point provided by Multiple Listing Service, MLS, a real estate network of more than 2,500 cooperating offices. The MLS listing database is considered the most accurate source for property details and market numbers on the internet or elsewhere.

Months Supply of Inventory tells you how many months it would take for the market to absorb active inventory. When a market is balanced, or neutral, there’s a six-month supply of inventory. If the supply is less than six months, then the market favors sellers. If the market is more than six months, then buyers will have the negotiating power. MLS does this calculation for you to help you anticipate how the market will swing before it impacts your sale.

Length of Time on Market

Looking to go deeper than Months Supply of Inventory? Check the length of time a home has been on the market. The longer a house stays on the market, the more likely it’s a buyer’s market. Homes that go under contract quickly mean the market is heating up. You’ll need to do your research and move fast if there’s a property that fits your needs. Check pricing trends as well to see if there’s been a decline in prices (the sign of a buyer’s market) or an increase (the sign of a seller’s market).

Ratio of sold homes per available inventory

“This metric tracks how many homes were sold out of the total listings in a given market,” writes one real estate expert. This metric is where the month’s supply metric comes from; it can be used to show the overall health of a market, as well as to track the desirability of a neighborhood. When inventory is lower, the sellers have the advantage. Here’s what this stat can show you:

Less than two months of supply: strong upward pressure on price, resulting in as high as double-digit appreciation.

Three to four months of supply: upward pressure on prices resulting in appreciating values.

Five to six months of supply: a balanced market with little to no fluctuation in value.

Seven to eight months supply: downward pressure on prices, leading to declining values.

Nine or more months’ supply: extreme oversupply and declining prices.

This gives you a more specific outlook from the existing inventory. With these data points in mind, you can better time your real estate sale to work in your favor.

Tips for timing the market

Buying a home? If you’re in a buyer’s market, you’re in a great position. You’re able to ask sellers to pay for many things, including paying your closing costs, special reports for pest inspections, home warranty, and repairs. You can also ask for longer inspection periods, extend closing deadlines, or ask for early possession. However, if you’re making a purchase in a seller’s market, you’ll be competing with lots of other families and may have to pay more than you intended. It’s ideal to wait for a neutral or buyer’s market to get the best price.

Selling a home? Then try to time the market for when list-to-sales price ratios are lower and you can command high prices. In a seller’s market, you have leverage to refuse to pay closing costs, negotiate shorter inspection periods, and sell “as is” without having to make repairs. In a buyer’s market, however, it’s likely you’ll lose equity. “Because there is little demand for homes it will put pressure on sales prices pushing the market downward. This downward momentum causes many buyers to make lowball offers.” 

MLS maintains a high level of accuracy in the information that’s entered: as a result, property buyers and sellers can go straight to the source to get the most reliable real estate information for their specific market.