Remaining Months of Inventory: Use with Caution
In the midst of the peak selling season, I take a look at the active inventory and compare it to sales. Noting the average monthly sales pace as compared to the current inventory gives us the estimated remaining months of inventory. To illustrate, if there were 24 sales in the prior 12 months, then the monthly sales pace or absorption rate is two per month. If there are currently 18 active listings, then there would be an estimated nine months of remaining inventory, assuming two sales per month. The calculation does not take into account a projection for additional listings that will be added in future months, so remaining months must be viewed in context, with particular note paid to seasonality.
The MLS calculates remaining months of inventory based only on the prior month sales, but beware, the result can be quite choppy and misleading. A slow month (which could simply being a reflection of timing given poor weather) could make it appear that there is a surge in remaining inventory. If the subsequent month then has more closings (as a result of such delay), then remaining inventory would appear to go way down, even though it may have been simply the result of the timing of closings, rather than actual shifts in demand.
A better way to look at remaining inventory is by taking into account a time frame that accounts for the longer selling period of homes and the inherent seasonality. If the remaining months of inventory is averaging less than 12 months, then looking at the prior twelve months makes sense. I did and found while the results made sense for the lower price ranges, it became skewed for the higher price points. If the average selling period is longer than twelve months, as it is for higher priced homes in Greenwich, then a longer period of sales gives an even better indication. Given that homes priced over $4 million have over 24 months of remaining inventory, I took a look at the prior twelve months sales and share the results here.
The graph reveals that the sales of lower priced homes substantially exceeds the current inventory, resulting in few months of remaining inventory. That makes sense. It also makes sense that at the high end, there are more remaining months of inventory given the current active inventory and slower sales. However, it is important to note, that where sales are slow, a small uptick in sales can have a dramatic effect in remaining inventory. For example, if there had been simply two more sales over the prior two year period in the $7.0-$7.5 million price range, then the remaining months of inventory would drop from 64 months to 48 months. One could also argue that $500,000 increments makes sense for the low end of the range, but higher increments makes sense at the higher price points. True. In this instance, I choose to show regular $500,000 increments to illustrate the both the general trends and shortcomings of using remaining inventory as a yardstick without considering the underlying data, calculations and market.
