Understanding Supply and Demand Introduction Supply and Demand refers to the relationship between the number of homes sold in the past 12 months and the number currently for sale. The search criteria for this analysis is generally the subdivision; however, could also be the MLS Area Number, the zip code, the school district, etc. Condition is certainly an important factor in establishing a list price for a property; however, the list price is affected by Supply and Demand (a component of Market Conditions). It is common for a homeowner to base their list price on the condition – without considering market conditions. This generally results in too high of a list price. The formula is Number Sold in Past 12 Months divided by 12, then divided into the Number For Sale. A shortcut formula is provided below. As Realtors® we need to be able to explain why and how Supply and Demand has an effect on a competitive list price, since the marketing time is a function of list price. Determining Supply and Demand Step One Using the MLS, search the subdivision with a closing date going back 12 months.  Search for Active and Sold properties (Select "Statistics" not Search) and print. Note the number of homes for sale and the number of closed sales –this is for determining Supply and Demand, which is the relationship between listings and sales.  If the list of listings and/or sales for the subdivision is too short, change the search criteria and do not enter the subdivision name – enter Key Map pages or grids, zip code, school district, or even the MLS Major Area number (this is useful for rural areas, since the entire county may be the market area). The change in supply and demand is an important factor in determining market conditions in a market area. Are prices likely to increase? (seller’s market), or decrease? (buyer’s market), or remain stable with some fluctuations in prices? (between a buyer’s and seller’s market). Generally less than a 5-month supply of homes tends to be (or may become) a sellers market. Greater than an 8-month supply of homes tends to be a buyers market. A 5 to 8 month supply of homes is a "gray" area where the market could be interpreted to be a stable market with values only fluctuating slightly and each subdivision (or house) would be evaluated on its own merit. NOTE: Once you have determined the supply of homes in the subdivision, you may need to do the same for your specific house if there is a wide range of property types, sizes, prices, ages, et cetera. Some subdivisions have two or three "real estate markets, or market segments" in the same subdivision. Change your search criteria to search for similar homes (age, size, features such as golf course, waterfront, etc.). Step Two To Determine Supply and Demand A. Divide 12 into the number of homes that sold during the past 12 months to determine the number that sell per month (average over the year’s time). Going back only six months will not give an accurate indication. B. Now divide the number of sales per month into the number of homes for sale. This indicates the supply of homes. C. As an example: if 48 homes sold in the past 12 months, that is 4 sales per month. If there are 24 homes for sale, there is a 6-month supply of homes on the market. D. The formula is Number Sold in Past 12 Months divided by 12, then divided into the Number For Sale. Or: 48 homes sold divided by 12 = 4 sales/month. 24 homes for sale divided by 4 sales per month equals a 6-month supply on the market. E. Less than a 5-month supply of homes is considered good (is or may become a seller’s market). A 5 to 7 month supply of homes is average (may or may not be a buyer’s market). An 8 to 12 month supply or more may be considered an over-supply. While this formula is somewhat cumbersome – it illustrates the method used to determine supply and demand. Understanding how the formula works makes it easy to explain the process to the homeowner. This allows you to present "facts" instead of opinions as to the market conditions affecting prices in their neighborhood. A shortcut formula using a calculator is shown below. Your calculator needs to have a reciprocal key, which is the key labeled 1/x. By using this key, you save steps entering numbers. 1. Enter 48 (number of homes sold in past 12 months in example above 2. Press the "Divide" key, then 3. Enter 12 (for 12 months) 4. Press the "Equal" key (answer is 4, which is 4 sales per month) 5. Press the 1/x key (the answer 4 changes to a decimal number – in this case 0.25) 6. Press the "Times" key (Multiplication key) 7. Enter 24 (the number of homes for sale in this example) The answer is 6, which is the supply of homes in months – a 6-month supply. Another shortcut is to divide the number of sales (48) into 12(months) and then multiply by the number of homes for sale (24) – in this example. NOTE: A six-month supply of homes does not mean it would take six months to sell, it means that it would take 6 months to sell these 24 listings if no other listings come on the market. The marketing time is a function of list price, and the list price is a function of supply and demand. Supply and Demand is the relationship between the number of homes for sale, and the number sold in the past 12 months Now we can put this process to work – you are preparing a CMA for West Memorial in MLS Area 36 Using Area 36 as the overall market area and search criteria: There are 2,390 sales in the past 12 months, or 199 sales per month in Area 36. There are 1,030 listings in Area 36 2,390 sales divided by 12 months equals 199 sales per month. 1,030 listings divided by 199 sales a month equals 5.18 months, which is the supply of homes in Area 36. That is, there is just over a 5- month supply of homes for sale in Area 36. There are 74 sales and 26 listings in West Memorial 74 divided by 12 equals 6.17 sales per month (the Absorption Rate) 26 listings divided by 6.17 equals a 4.2-month supply of homes for sale in West Memorial compared to a 5.18-month supply in all of Area 36. The supply of homes is more meaningful when compared to something else; in this case compared to all of Area 36. It would be better to compare each month’s supply of homes in West Memorial (in this example). Any change in supply will warn you before prices change that you can expect a change in prices. A small change in supply in just a months time would not be significant. However, a steady increase, or decrease in supply would indicate a change in prices is going to occur. Armed with facts/statistics/figures, it should be easier to explain the importance of a reasonable and competitive list price. Copyright Gil South January 2006