Months supply is one of the most insightful statistics used to describe the housing market. It gives a concise assessment of a market's condition as of that point in time. Yet, what is the current supply figure telling us? To begin, let us first define what we mean by months supply. Months supply is calculated as the ratio of inventory available for sale to total sales in a given month. Any increase in inventory and/or decline in sales will cause months supply to increase, and vice versa. Lower values of months supply suggest demand for housing is greater than its supply, and higher values indicate the opposite trend.

The National Market

Months supply had been increasing steadily since the peak of the housing boom in late 2005 to its peak of 10 months in 2008. This figure has declined somewhat to its current level of 9 months in 2009. Yet, months supply in 2009 is still higher than the pre-2002 boom average of 5.5 months. Between 2005 and 2008, sales decreased by 1.8M units (a 29% decline). Over that same time frame, inventory decreased by 1.3M units (a 59% increase). To put this in perspective, sales in 2008 are at levels last seen in 1998, yet the supply is approximately twice 1998 levels.

Although months supply still remains higher than what can be considered an ideal level, the current level of supply varies quite widely by price point.

Market Segment Matters

The table below details months supply by region and price range. We can see that there is a distinct difference between the market at the lower price points and that at the higher points. For example, months supply in the $0-250,000 market is currently 6 months nationally versus 8 months one year ago. To be sure, this low supply figure is primarily driven by the western region, where areas like Phoenix and Las Vegas have exhibited large numbers of distressed sales. Currently, the months supply for the less than $250,000 market in the western region is below 3!

In contrast, the $1,000,000+ market is almost frozen. Months supply in this market is currently 21 months. The relative lethargy in the $1,000,000+ market is attributable in part to relatively high mortgage rates on non-conforming loans which have not benefited from government programs like the TARP as their conforming counterparts have. The more onerous rates on non-conforming loans are precluding a lot of eligible borrowers from coming into this market.

The $1,000,000+ market is also inhibited by a relative reluctance on the part of owners to lower the list price on their homes in the hope that the market will turn in their favor if they simply wait. In spite of substantial decreases in demand, the median price in this market remains almost unchanged from a year ago. As a result of price rigidity and limited financing opportunities, sales have declined nationally from last year by approximately 30% for the $1,000,000 plus market. In contrast, the less than $250,000 market has seen an increase in sales, again driven by the western region, as prices have fallen substantially. The northeast is the lone exception to this where prices still remain somewhat rigid.

Although there is currently a large disparity in the level of activity in the less than $250,000 market and activity at higher price points, these markets should converge over time. According to NAR's realtor survey, the percentage of distressed sales as a portion of total sales has been declining steadily over the last several months. As of June, distressed sales made up 31% of total sales which is significantly lower than the March figure of 49%. As fewer distressed properties flood the less than $250,000 market, sales in markets like Phoenix and Las Vegas will begin to abate. Similarly, as confidence in the overall housing market starts to improve - NAR reports that sales have increased nationally for the last three consecutive months through June - demand will begin to increase at the higher price points.

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