Is Five Months of Supply Still the Right Way to Determine a Healthy Real Estate Market?
The long standing thought in real estate practice is that a five or six-month supply of home inventory signals a healthy housing market. Historically, this metric was believed to correlate with moderate home price appreciation and Buyers' activity level compared with Sellers. Levels higher than this suggested a buyers' market, while lower levels indicated a sellers' market. But is this traditional benchmark still relevant?
Months of supply measures how long it would take for the current inventory of homes to be sold at the current sales pace. It is calculated by dividing the total number of active listings by the average number of monthly sales over the past 12 month period.
Current supply is considerably low, in the Washington, DC Metro Area, figures show only 1.8 month’s worth of inventory. With many local markets still experiencing even tighter conditions. Less than a month in Falls Church for example. In fact, the DC area and Virginia as a whole, haven’t seen a supply of five months or more since September 2016.
This metric is influenced not only by the number of active listings but also by the rate at which homes are selling. For example, if there are 100 homes on the market at the start of the month and 100 new listings come in, the end-of-month inventory could be 200 if no homes sell. Conversely, if all new listings are quickly sold, the inventory might remain at 100. Thus, the months of supply metric reflects both listing volume and the speed of home sales.
A more accurate indicator of market health may be how quickly homes are selling, such as the median days on market. As of July 2024, the DC Area median days on market was just 8 days, meaning half of all homes sold within this time frame. Such rapid sales indicate a highly competitive market where buyers have limited time to make decisions.
In a more balanced market, a median days on market of around 22 to 30 days might be expected, with half of homes selling in 30 days or less and the other half taking longer. The last time the median days on market hovered around 30 days consistently was in 2017.
Currently, the DC Area real estate market remains decidedly a Sellers’ market. Achieving a more balanced state would require a significant increase in inventory and a slower pace of sales. While most local cities are far from it, Washington, DC itself is on track to potentially hit the traditional Buyers' Market figure. Although not there yet, it is currently 4.42 months of inventory, and 22 days on market (DOM), well over the 5 year DC average of 2.7 DOM. With all that being said, prices are still rising considerably everywhere in the DC Area.
Here's a similar chart from August 2021 to compare where we were three years ago.
Looking ahead, while buyer activity has calmed somewhat due to higher mortgage rates, inventory has remained tight. We are still very unlikely to approach the five or six-month supply threshold anytime soon. Though we have seen a slight increase in median days on market, the market has and most likely will continue to favor sellers, with a balanced market a distant prospect, especially with the mortgage rates finally dropping to give potential Buyers some relief and a solid reason to jump back into the market.
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