Real estate is full of old saws, pithy aphorisms, rules of thumb, and the like. One measure– months of inventory– has historically been used as a barometer for deciding whether it’s a buyer’s market or a seller’s market. Months of inventory is a calculation in which the number of currently active listings is divided by the past month’s closed sales, so if there are 3000 active listings in a region and 1000 recent sales, there are three months of inventory on market. It would, theoretically, take three months to sell all of the active listings at the current rate of sales if no other houses went on market. The rule of thumb has been that anything under four months is a seller’s market, four to six months is a balanced market, and six or more months is a buyer’s market. Simple. Too simple.
I don’t particularly care for this old rule of thumb for a couple of reasons. First of all, it’s old. They’ve been using this rule of thumb for decades, while the way people shop for and purchase homes has changed dramatically. Neither Zillow nor email existed in 1985, so buyers weren’t getting instant alerts when anything in their filters went on market. They waited for their Realtor to sift through the big monthly book of new listings to find good ones to show, at which time they piled into the car and hit some listings. When it came time to get a loan or write an offer, there were no DocuSigns flying back and forth to speed up the process. It all took longer than it does today, so I don’t think it takes six months before it tips into a solid buyer’s market. Buyers aren’t accustomed to waiting as long as they used to, nor are sellers.
I also tend to ignore the months of inventory metric since it’s commonly just applied to larger market segments, which makes it less useful. Our local MLS tells us each month what the stat currently is (3.7 months for May, by the way). That applies to everything in this MLS’s coverage– 4000+ recent sales, 15,000 and change active listings. If you’re buying or selling a luxury condo in the Pearl District, why would you take guidance from a metric that also includes acreage in Eugene or beachfront property in Seaside?
Market segments matter more than anything else. When looking at the Portland metro (Multnomah and Washington counties only– sorry Clackamas, you’ve got too many big farms skewing the data), there are a few things that really stand out. Notably, single-level detached homes, the scarcity of which I’ve written about before, are currently at 1.5 months of inventory (with Washington County at 1.3 and Multnomah at 1.7). Multi-story homes are at 2.5 across both counties, but about a half a month lower in MultCo.
On the flip side are condos and townhomes at 5.7 months of inventory (5 in Washington County, 6.1 in Multnomah). Anecdotally, any Realtor will tell you that it’s most certainly a buyer’s market for those, especially the ones in Multnomah County. So let’s go back to that 3.7 number from before, which is the total months of inventory for the region averaged out. That doesn’t help you if you’re buying or selling a single-level home or a condo, or any number of other market segments.
When parsing data to make better decisions, this is one area where it’s best to get granular. If you’re selling a house in, for example, Lake Oswego, don’t bother with the whole MLS’s stats. Market absorption in that community for that type of house is what matters, and the more you can narrow it down the better. Also, simply dividing the active listings by the sold ones isn’t quite enough to get the full picture. Pending transactions matter too, particularly for the trendline, and any Realtor worth their salt will incorporate all that info into the advice they give you.
The other key takeaway, as it pertains to sellers, is to know what the market absorption looks like for your house so you can put yourself at the top of the list. If there are twenty actively listed houses in your segment and they’re selling at a rate of four a month (five months of inventory), you need to be prepped and priced to be one of those four. It’s not a matter of waiting five months to sell your house, because it doesn’t work that way. Remember, the months of inventory metric is more of a barometer than a usable tool. Every month, new homes will come on market that you’ll be competing with. If you aren’t competitive with those top homes on price or condition, you’ll get left behind every month.
This all falls into the general category of market conditions, knowledge of which are of crucial importance to both buyers and sellers. Buyers need to know how competitive their market segment is so they don’t either overpay or offer too little, and get left behind. Sellers need to know how to price, prep, and market their home for the market they’re in. It’s not 2021 anymore. There’s nuance now.
