In this blog post, I’ll explain a basic concept called “absorption rate” or “months supply” which can be very useful when making a real estate decision. Then we’ll look at our Chicagoland market to see what’s happening in real time. Full disclosure, there’s a little math ahead which feels right since I have an engineering background and can’t help myself.
Have you ever heard people say we are in a buyer’s market or seller’s market? Well, one of ways to interpret this is to look at “months supply” or “absorption rate”. Months supply is a calculation of the number of months it would take to sell all of the homes listed for sale in a given market (zip code, city, neighborhood, etc) based on the current selling rate, assuming that no new listings are added and the selling rate remains constant.
So if there are 200 active listings in October and the selling rate is 50 homes per month, the months supply in October would be 200 / 50 which equals 4 months. In this case, it would theoretically take 4 months to sell all the homes in this market.
In general (and experts argue about exactly where this number should be), more than 6 months supply indicates high inventory and favors buyers (buyer’s market) while less than 6 months of supply indicates low inventory and favors sellers (seller’s market). Months supply is based on the basic economics principle of supply and demand i.e. prices tend to decrease when supply goes up and demand goes down (buyers market) and inversely, prices tend to increase when supply goes down and demand goes up (sellers market).
Now let’s see how the Chicagoland area is doing… oh look a graph! Here’s the months supply in the Chicagoland area based on monthly data points over the last four years
What’s this sweet graph telling us?
1) We are still in a sellers market since we are well below 6 months supply
2) Last month, the month supply was at 3.9 months
3) There has been a general downward trend of the market becoming more and more of a sellers market with the only exception being a slightly higher months supply in August of 2018 vs August 2017. Could this be the first sign that we are stabilizing or moving toward a buyer’s market? It’s difficult to say this early on, but I will be reporting the state of the market regularly so stay tuned for the upcoming newsletters to stay on top of trend.
4) There is a clear seasonal trend which implies that there is more inventory in the summer months and less in the winter months. This makes common sense since most sellers wait till the warmer months to list their home. What isn't totally obvious is that by looking at the graph, someone may think that the winter is the best time to sell because the months supply is so low, but they would be very wrong… especially in freezing cold Chicago! What’s happening here is that the graph isn't capturing vital information that while inventory goes down dramatically in the winter, so does buyer demand (rate of selling) and therefore the months supply goes down “artificially”, because of how months supply is calculated. A clear limitation of the measure.
5) Due to the above, if you’ve been kicking around the idea of selling, it may be prudent to consider selling early in 2019 in case the market does shift more favorably toward the buyers in 2019 and beyond. As the market begins to shift, timing becomes increasingly important to when a listing hits the market so contact me if you are considering a move so we can strategize about market timing.
As described in point 4 above, misinterpreting data without having all the information can have disastrous consequences for a seller. Remember that months supply is merely one measure out of many that gives us an indication of how the real estate market is doing.
Additionally, statistics aren't perfect but in my opinion, coupling the numbers with the advice of a professional who is in the field every day will give you the truest representation of how the market is doing. So don’t hesitate to reach out even if you’re just curious.
Another salient point, real estate is highly local so if you’d like me to pull up a months supply report for your specific area, just contact me!