The Introduction to real estate market analysis
There are many statistical numbers followed in the real estate industry to understand the market condition. These numbers also help in market analysis and eventually predict the future behaviour of the market.
Many businesses, financial institutions and government sectors have dedicated people to go over these numbers. It should not be a surprise considering the real estate industry's importance to the economy, politics, and job market.
You'll find all sorts of real estate market analyses posted weekly, monthly, and quarterly. Many experts will admit, some markets can be very challenging to predict. We have witnessed this in Canada, particularly in Toronto and Vancouver - where we have seen continuous contradictory predictions. The uncertainty can be frustrating for the new homebuyers and other home sellers and buyers as well.
What is the definition of inventory, also referred to as supply or stock?
The definition of inventory varies depending on the industry. In real estate, inventory or supply is the total number of houses (listings) in a particular market. In this article, we'll mostly be talking about the complete inventory within a month - the total number of listings in one month. Multiple Listing Service (MLS) is the primary source of real estate data, including the entire listing within a month. For example, according to MLS, there are in total 3000 new listings in January.
Understanding the supply and demand in real estate and their direct relationship to house pricing
If you have more supply than demand, the price will drop. On the contrary, if you have less supply than demand, the competition for the limited supply will drive the price higher. It is clear the inventory of houses in the given period will dictate the house pricing in the market. In short, the inventory and price have a direct relationship. Hence, there is a great deal of interest to track the inventory of homes at any given time. Also, to estimate the possible supply of homes to predict house prices in the future.
Note: in the long run, only the new home construction increases the total house inventory
In the long run, the resale homes do not contribute to the total inventory; since sellers are the future buyers. A seller will typically end up buying another house, and the total number does not change. In fact, it is the new home construction that increases the supply of homes in the long run. The number of new home construction is an essential parameter that many experts follow in the field. However, the home inventory can increase quickly in the short run because the sellers and investors decide to enter the market.
Keeping it simple and easy for a quick market analysis
It is not difficult to see the value of inventory numbers for real estate market analysis to understand the current market and forecast the future. Among the many statistical tools used for market analysis, I believe house inventory is the most useful and most straightforward method to employ.
In my years of working in the real estate industry, I have routinely read market analysis reports. After many years, I still have to stare at the complicated graphs and decipher the meaning of adjusted data seasonally, annually, or any other versions. I do not mean to dismiss the value or the usefulness of all the data. But here, I am suggesting an analysis tool that anyone can use for quick and easy market insight.
What is the Months Of Inventory (MOI) in real estate?
The months of inventory (MOI) is a creative way of calculating how many months of house supply is currently in the market. For example, there are in total 8000 new listings in January (one month period), and 2000 of those listings are sold in the period. Since we have the rate of 2000 houses sold in a month, we have four months of supply currently in the market. Let's look at a sample calculation below.
How to calculate MOI
total LISTINGS for a given month / total listing SOLD for a given month = number of MOI
8000 houses in January / 2000 houses sold in January = 4 Months of Inventory
The calculation and interpretation of MOI are straightforward; however, there are caveats that worth mentioning. The MOI number is based on two assumptions listed below.
Months of inventory interpretation and its relation to the type of market
Seller's market. When MOI is between zero and four months, supply is relatively low, which means sellers set terms or raise prices.
A balanced market. When MOI is between five and seven months, supply is standard, and the market has the right balance of buyers and sellers.
Buyer's Market. When MOI is eight and more, the inventory is high, and buyers have more negotiating power.
Keep in mind MOI number is a convenient tool for investors, sellers, buyers; however, there are many other variables at play in different markets. MOI numbers should be used as a simple guideline for your market analysis. It is advisable to consult with your trusted real estate agents since they are trained professionals to guide your decision-making.
The above Real Estate article was provided by David Khosravi, a leader in his field in North York, Willowdale Real Estate, Reach out to David via email: email@example.com or by phone: 416.990.2424