Definition
Months of supply is calculated by dividing available properties by monthly sales rate. This shows how long it would take to sell all inventory at current pace. Below 4 months typically favors sellers; above 6 favors buyers.
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Months of supply is a critical metric for understanding market balance and direction. A supply of 6 months or more typically indicates a buyer's market with negotiating power favoring buyers. Supply below 3-4 months typically indicates a seller's market favoring sellers. Supply near 4-6 months indicates a balanced market. Months of supply trends are more meaningful than the absolute number—increasing supply signals softening markets, while decreasing supply signals strengthening markets.
Pro Tip
Monitor months of supply closely. It's the most reliable indicator of market balance and buyer/seller advantage.
Example
A market has 2,000 active listings with an average sales rate of 500 homes per month. This equals 4 months of supply (2,000 divided by 500), indicating a balanced market slightly favoring sellers.