Lew Sichelman, a syndicated real estate columnist, wrote about some helpful real estate market statistics in today’s print version of the Chicago Tribune, but I must take exception to his calculation of month’s supply of homes on the market. The online version of the article, “The need-to-know numbers, for buyer and sellers”, isn’t available on ChicagoTribune.Com, but you can read the same article (different title) on the Las Vegas Review-Journal.
According to Lew, “Ask your agent to count the number of houses currently for sale in your market. Then ask him to divide that figure by the number of sales contracts from the previous month. The result is the ratio of demand to supply, which will tell you the relative strength of your local market.
If there are, say, 18 active listings and six transactions waiting to close, you can determine there are three sales a month by dividing six into 18. Now divide three sales a month into 18 listings and you’ll know there’s a six-month supply of houses on the market.”
If I understand Lew, sales per month is a function of the number of active listings divided by sales contracts for the previous month. That doesn’t make any sense. Sales (contracts to be more precise) per month is just that, the number of sales (contracts) in a month. It has nothing to do with the number of active listings. So in this case, there is a 3 month supply of homes on the market since it will take 3 months to sell 18 homes at the current rate of 6 homes selling (going under contract) per month.
The other component I question about Lew’s calculation is his use of the previous month’s contracts. I like the idea of using contracts as opposed to sales closings since contracts are a fresher measure of what is happening in the market. A sale that closed last month could represent a decision to buy last month or a few months earlier. However, not all contracts become closings so using contracts instead of actual sales will give us an overly optimistic month’s supply value. Thus, some Realtors use actual sales for the previous month instead of contracts. Other Realtors use an average of contracts and/or sales over the past few months instead of just last month’s data.