How Do You Know When it is a Buyers Market or a Sellers Market? MSI is the Answer.

I am often asked by clients what the months supply of inventory (MSI) has to do with anything? This number, in summary, helps determine if we are in a buyers market or a sellers market. Read on for a simplified explanation provided by Showing Time.

The What: Months Supply of Inventory (MSI) is a calculation that quantifies the relationship between supply and demand in a housing market. If new homes stopped entering the market, how many months would it take to burn through all of the homes currently available for sale? MSI answers this question.

The How: MSI is typically calculated by dividing the current month’s inventory figure by a rolling 12-month calculation of pending sales. It’s also possible to use monthly pending sales, monthly closed sales or rolling 12-month closed sales, but ShowingTime prefers the rolling 12-month pending sales figure to adjust for seasonality and to retain the forward-looking, predictive nature of pending sales, rather than the backward-looking closed sales figure.

The Oops: MSI is often mistaken for an inventory-only related metric. MSI is related to inventory but is not solely informed by inventory. It speaks to the relationship between inventory and buyer activity. We often field questions about the mysterious relationship between a rising inventory and falling months of supply.

The Beauty: MSI seeks to quantify how many months it would take the market (in its current condition) to absorb the entire active inventory. So we’re easily able to see if the market is favoring buyers or sellers. Generally, a balanced market will lie somewhere between four and six months of supply. If MSI is displayed as less than 4.0, sellers have gained asking power. If MSI is above 6.0, buyers have gained negotiation power.