In real estate, supply and demand is represented as the current month’s supply of 
homes for sale (the number of homes for sale divided by the number of homes sold in the previous month).
Most real estate professionals know, or at least have a good idea of, the month’s supply of inventory in their market because of its affect on pricing moving forward.
While there is no steadfast rule that will apply to pricing in every category of housing, here is a great guideline by which to go:
1-4 months’ supply creates a sellers’ market where there are not enough homes to satisfy buyer demand. Appreciation is guaranteed.
5-6 months’ supply creates a balanced market. Historically home values appreciate at a rate a little greater than inflation.
7-8 months’ supply creates a buyers’ market where the number of homes for sale exceeds the demand. Depreciation follows.
Real estate professionals should be prepared to discuss home values with either a seller or buyer, and be prepared to show what the supply of, and demand for, homes is in the same category of home they are thinking of selling or buying.
Sean S. Williams
Licensed Broker, Realtor®, ABR®, e-Pro®
1st Time Buyer & Relocation Specialist
502.727.9784 cell
Semonin Realtors
of Louisville, Kentucky
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I believe firmly in the laws of economics and supply and demand. The problem here is that the shadow inventory held by mortgage companies...banks...distorts the supply end of the equation. The shadows are hard to quantify.
Sean, This is a great simplified post to explain market absorption rate and how it affects sellers and buyers in real estate!
Nice post, In florida we have buyers but no good homes!!!...We can't even say it's a seller market... Hope and pray things change soon!!!
JACOB - we have the same situation here in Louisville, KY. We have a high demand from buyers but not enough quality inventory available for sale. If you have a good listing it will likely get snatched up fairly quickly. We have definately moved closer & closer in the past year to a more "balanced market" versus where we were even just a year ago.
ERV - Shadow Inventory is a great point to include and like you said it is difficult to quantify at this point in time. Only time will tell...
Nice post - simple but true concepts - we have a sellers market in most parts of the country but things can change quickly with higher interest rates, higher prices, more bank listings, etc. Regards Dave
Just as some fear a shadow inventory of homes, I am starting to believe it will be countered with a shadow inventory of buyers. Rates are low, and rent vs. own leans in favor of owning.
GARY - Shadow inventory is a posing threat for many markets but not every market. And even with the markets that may be facing a large shadow inventory in the near future, I feel as if many savy investors will start to take advantage of these discount properties. I can tell you I will personally be looking to take advtange of these types of properties in the Louisville market in the next year or two!
Hi Sean -- very clear explanation that will certainly enlighten the buyers and sellers in Louisville and beyond. Nicely presented.
Sean ~ good explanation on supply vs demand. Here in Portland, our market has shifted towards a sellers market, making many sellers happier than in recent years.