When it comes to predicting where home prices are heading, one key metric is the most important: months of supply.
Months of supply refers to how many months it would take to sell the current inventory of homes at the current sales pace. Nationally, months of supply has recently risen to 4.2 months, which traditionally signals a balanced market. Generally, experts consider 3 to 6 months of supply as balanced, where neither buyers nor sellers have the upper hand.
However, Lance Lambert at Resiclub estimates that if the national months of supply hits 5.0 months, we could start to see price declines. The graph below, from Calculated Risk, illustrates the close relationship between months of supply and changes in home prices.
Historically, home prices tend to drop when months of supply sits between 5 and 9 months, depending on broader economic conditions. The following graph shows that nationally we are at 4.2 months, close to that five-month mark.
While these figures give us insight into the national housing market, they don't always track directly with local markets. For instance, here in Whatcom County, the months of supply is still at 2.6 months—well below the threshold where we might expect price drops. The following graph shows the local months of supply, reflecting a much tighter market.
This indicates that, locally, the market remains tight, and home prices are less likely to see immediate declines, but we should keep an eye on this metric as the market keeps moving. We know that affordability is still relatively poor and many buyers are not participating because of this. The seller are still holding off on listing their homes though, keeping their low mortgage rate.
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