Watch Months-of-Supply!


By Bill McBride

Although inventory is well below normal levels, so are sales. I think we need to keep an eye on months-of-supply. Historically nominal prices declined when months-of-supply approached 6 months – and that is unlikely this year – but we could see months-of-supply back to 2019 levels later this year.

What would it take to get months-of-supply back to 2019 levels by mid-year? The following table is a simple exercise. If sales stay depressed at 2023 levels, how much would inventory have to increase to put months-of-supply at 2019 levels?

The answer is – if sales continue to track last year – NAR reported inventory would have to increase to around 1.4 million by July for months-of-supply to match 2019 levels. That would be a 15% increase from the April levels, but still leave inventory about 23% below 2019 levels.

An increase to 2019 levels of months-of-supply wouldn’t suggest falling prices, but it would likely lead to a slowdown in price increases. In 2019, the Case-Shiller National index increased 3.8% YoY. recently reported for April:

There were 30.4% more homes actively for sale on a typical day in April compared with the same time in 2023, marking the sixth consecutive month of annual inventory growth. … However, while inventory this April is much improved compared with the previous three years, it is still down 35.9% compared with typical 2017 to 2019 levels.

Using the data, inventory would have to increase by about 20% to around 880 thousand for months-of-supply to be back to 2019 levels by July. This is possible.

Note that months-of-supply is calculated using the Seasonally Adjusted (SA) sales rate, and the Not Seasonally Adjusted (NSA) levels of inventory. Months-of-supply was actually back to 2019 levels in December (for just one month).

Inventory and months-of-supply will be something to watch carefully all year!