Months of inventory (MOI) - what it means and why it’s an important statistic.

Before we discuss the importance of this statistic let’s identify what it actually is, and how to calculate it.

Definition.

The months of inventory means the number of months it would take to sell the current homes inventory at the current rate of sales activity, it is a calculation that quantifies the relationship between the supply and demand in the current market conditions.

How to calculate months of inventory.

The months of inventory is calculated by the number of properties available for sale divided by number of properties sold in a month.

What do the calculations mean.

In essence the bigger the number of months of inventory the weaker the market. Generally speaking, we can describe the market conditions as three main categories:

• The buyers’ market – the supply of the inventory for sale exceeds the demand from the buyers and it takes longer to sell the properties.
• The balanced market – the demand meets the supply and the properties which are reasonably priced are sold within a reasonable time, typically few weeks.
• The sellers’ market – the demand exceeds the supply, properties are sold very quickly, quite often with multiple offers.

Obviously, we can have a variances in buyer and sellers markets, during the recession we can have properties sitting on the market for months or even longer and the buyers aren’t able to, or are not interested in purchasing them, on the other extreme end we can have a crazy sellers market where most properties are selling within days in multiple offers.

How to interpret the numbers.

A balanced market is often defined as 4-6 months of inventory, although in GTA where the market is strong, more often than not 3-5 months of inventory could be classified as a balance market.

Sellers’ market would be less than 3 months of inventory, and the lower the number the stronger the market, at the peak we had months of inventory less than 1, that’s the time where properties were sold with an offer day and many were getting 20 or more offers.

Buyers’ market would be a number higher than 5 or 6 months, the higher the number the weaker the market. Currently, at the time of writing this blog, we are in the buyers’ market in Downtown Toronto condos with MOI over 6.

Why is MOI an important metric.

There are many other metrics to help determine the market condition, we think MOI is one of the more accurate ones. Selling price to list price may not be very accurate, while being a decent indicator, many sellers will underprice the property for a bidding war. Days on the market will not always be accurate because the properties can be terminated and relisted over and over again. MOI shouldn’t be the only statistic used when determining the market conditions, but it’s definitely an important one.

Hope this blog helps explain in simple terms what months of inventory means and how to read it. Please let us know if you have any questions.