What does inventory mean?
Updated June 25, 2021
Inventory is the raw count of the number of properties being actively marketed and listed for sale. It is also known as “active listings” or simply “homes for sale.” Inventory is calculated monthly by taking the count of the properties marked as active on the last day of the month. For example, the third-quarter 2021 inventory will be the number of active listings on Sept. 30, 2021. Whenever a seller lists a home, it becomes part of the active inventory. As soon as a sale closes, it’s taken off the active inventory, but pending sales with signed contracts remain a part of inventory until they actually close. Real estate professionals, along with would-be home buyers and sellers, keep a close watch on inventory because it can serve as a barometer of the overall market.
Inventory levels increase when there is a slowdown in demand and new listings keep being added to the market. If inventory is on the rise, there is less pressure for home prices to increase. The levels decrease when buyers are active in the market and there is a limited supply of new homes for sale. Inventory can also be seasonal. In general, inventory tends to be down in the fall and winter in U.S. markets. Other factors that affect inventory include interest rates, consumer confidence, employment rates and the level of new construction in an area.
Inventory is the raw count of properties being marketed and listed for sale. Credit: Victor He/Unsplash
Inventory is also used to calculate what is known as “months’ supply.” This refers to the number of months it would take for the current inventory of homes on the market to sell, given the pace of current sales. The smaller the available inventory the tighter the market becomes. Historically in the U.S., five to seven months of supply is considered a normal or balanced market, one associated with a moderate price appreciation. When the number of months’ supply tips over seven, it tends to become a buyer’s market, with sellers facing a higher level of competition and making them more likely to be flexible about their price and other sale terms. Low inventory, on the other hand, gives an advantage to sellers because there are fewer homes for buyers to choose from. Persistent low inventory can result in a seller’s market that features multiple offers over the asking price, all-cash deals and bidding wars—and frustrated would-be buyers and agents. A seller’s market will typically have less than five months of inventory.
Buyers who are looking to buy a home when inventory is low need to be prepared to act quickly and decisively to secure a deal. They should get a preapproval letter from a lender that shows they are approved for a mortgage that matches the price range of the homes they are looking at. They should be working with a local real estate agent who knows the market they are considering and they should be looking at new listings on a daily basis. And they need to be prepared to put in a bid higher than the seller’s asking price. Sellers in a low-inventory market also need to be prepared—any repairs need to be done quickly and their home needs to be cleaned up and camera-ready for a professional photographer. And they need to be ready at a moment’s notice, especially during the first two weeks of a listing, to leave their home so that real estate agents can show their home to potential buyers.