Months’ supply key indicator for market behavior

When will home prices decrease?

That seems to be the million-dollar question. For the last 10 years, Las Vegas, and frankly almost every other major market in the country, has seen an incredible increase in home prices and a decrease in inventory. Meaning, if you have managed to purchase a home between 2011 and now, you are most likely sitting on a lot of home equity.

So, now the question that begs to be answered is when will the market stabilize? While you have probably heard a wide range of methods that industry professionals use to foresee a market downturn, the most accurate predictor of market behavior that I have seen in my nearly two decades of selling homes is months’ supply.

Months’ supply refers to the number of months it would take for the current inventory of properties on the market to sell given the current sales pace. For example, if there are 10,000 homes listed for sale and an average of 2,000 homes are selling each month, then the market would have a five months’ supply.

The best way to determine the market’s next move is comparing it to what is considered by economists as a balanced real estate market, in which the months’ supply is about six months. That will often guarantee that home prices will slowly increase 1 to 2 percent over a year.

In a stable market, supply and demand is balanced. There are reasonable negotiations for both buyers and sellers, and there is a healthy number of homes for buyers to choose from. Homes usually stay on the market for two or three months depending on a variety of factors, including how well they are priced, how accessible they are to prospective buyers and how well they show.

When you have more than a six months’ supply, home prices tend to decrease. Vice versa, when the months’ supply is significantly less than six months, there tends to be upward pressure on prices, such as what we have seen happen in the greater Las Vegas area.

Beginning in mid-2020, Las Vegas experienced record-breaking price growth as home inventory dropped to astonishingly low numbers.

For nearly 18 months there were between 2,500 and 3,500 homes on the market at any given time. In that same time period, between 3,000 and 4,000 homes were sold monthly, which means the market has been operating at less than or near a one months’ supply for more than a year.

That pattern is still holding strong, today. At the end of January, Las Vegas had about 2,800 homes listed across the valley with an average of 3,804 monthly closings, giving us significantly less than one month’s supply.

So, what will it take for home prices to finally decrease?

The last time we saw a substantial decrease in home prices was after the Great Recession in 2007 and 2008 when inventory was at an all-time high. At its peak, Las Vegas had roughly 24,000 homes listed for sale, but less than 1,000 closings per month for more than a 24 months’ supply. In that time, the median price for a home fell more than 50 percent.

The Las Vegas market has had its ups and downs throughout the past few decades, with periods of pricing stability in between. During those times, the market typically had between 10,000 and 11,000 homes listed with about 2,500 average monthly closings.

Using the months’ supply metric, the market would need to experience more than a five months’ supply in order to see a noticeable downward pressure on prices. For that to happen, there would need to be at least 7,200 additional homes listed for inventory levels to reach more than 10,000.

The market as it is right now will not last forever. For those who are waiting for prices to inevitably stabilize, I recommend following the months’ supply metric as you determine the best time to sell your current home or buy your next.

A Las Vegas native, Matthew Mullin is the Principal of the Mullin Group of Berkshire Hathaway HomeServices, Nevada Properties and has been a Realtor for nearly 20 years. Before entering the real estate industry, Matthew graduated from Princeton University with a bachelor’s degree in economics and worked in corporate finance and equity research for three years.