Months of Supply Inventory (MSI) and Absorption Rates in Real Estate
I love real estate statistics. I got a math degree from the University of Texas, so I could have a career in real estate statistics. In this article, I will introduce you to information on Monthly Supply Inventory (MSI), absorption rates, and their importance in making real estate decisions. I’ll do my best to keep things relatively simple!
Absorption rate: the rate at which real estate in a specific area is sold or absorbed
I calculate absorption rates in terms of homes sold per month. Thus, for South Lake Tahoe the absorption rate is the number of houses sold in the last year, 341, divided by the months of the year, twelve. 28.4 houses are sold per month in South Lake Tahoe. This is the absorption rate. (Feel free to skip the rest of this paragraph.) Some people like to express absorption rates relative to inventory quantity. Our inventory in South Lake Tahoe is 476 homes. Thus, 28.4 homes is 5.97% of the inventory; so the absorption rate is 5.97% of inventory per month.
Months of Supply Inventory (MSI): An estimate of how long it will take to sell or absorb all the homes on the market, based on how many homes are currently on the market and the rate of homes sold in the past (absorption rate). ).
This is pretty simple. If 28.4 houses are sold per month in South Lake Tahoe, how long will it take to sell 476 houses? Divide the houses by the houses sold per month (476/28.4 = ???). It will take 16.76 months to sell all the houses. This is the monthly supply inventory (MSI). Now you may be wondering, “Who cares? New homes get listed all the time. You’ll never sell all the inventory in South Lake Tahoe.”
This is true. MSI is simply used to compare the size of an inventory with the rate of sale. East It’s very important. MSI is a great indicator of how balanced a market is.
MSI less than 5 months = seller’s market
MSI equals 5-7 months = balanced market
MSI greater than 7 months = buyer’s market
These guidelines are not infallible. In South Lake Tahoe, there is currently a 6.7-month supply of inventory in the sub-$300,000 price band. However, any seller in this price range will tell you that it is not a balanced market. Buyers keep sending. The MSI stat was skewed in this price band by desperate sellers, especially banks, who went all out in the last year for buyers. Therefore, the absorption rate was increased, which decreased the MSI.
So how can these statistics help you? I preface the answer by saying that no mathematical model can be used to determine what will happen in real estate. There are too many factors involved. Having said that…
For sellers, these statistics will tell them how much competition they have. Consider a seller with a $1,500,000 listing in South Lake Tahoe. With almost 33 months of inventory, you better think about some serious price reductions if you want to sell soon. The seller with a listing under $500,000 (6.7-13.3 months of inventory) should also consider a price cut. However, there is a better chance that you will get lucky and find a buyer who loves your home and qualifies for a loan.
For buyers, MSI will tell you how marketable sellers can be in different markets. If there are 3.5 months of inventory in Bangladesh and 10.2 months of inventory in Baghdad, sellers in Baghdad are likely to be more marketable.
Like I said, don’t put too much weight on real estate statistics. But don’t ignore them! The MSI and absorption rates can definitely help you make better real estate decisions in the future.
