Property buyers, investors and those tracking the real estate market often come across the term ‘inventory’. According to the general definition, inventory refers to the raw materials that a company uses or the finished goods available for sale at the end of a certain period. In the real estate sector, housing stocks, such as unsold flats are referred to as inventory. It serves as an important metric for real estate investors, buyers, and sellers to gather insights into the property market.
Real estate inventory meaning
Real estate inventory refers to the number of unsold properties in the market or a specific area at a given time. It can include various types of properties, such as apartments, commercial space, and plots, which are available for sale. For property buyers and investors, an understanding of the current market and inventory level can be beneficial in making the right investment decisions. It helps them assess the saleability of a project and the developer’s performance and gives a clear picture of the demand and supply in a location.
The inventory level is the main indicator of the market supply, influencing property prices and avenues for buyers. The increase in inventory can reflect how a particular housing market has performed in a current period – the higher the inventory, the lower the sales. Low inventory levels reveal that it is a seller’s market, resulting in increased property prices as the demand is greater than supply.
See also: What is amortization in real estate?
What is the significance of real estate inventory?
Real estate inventory has a crucial role in the property market as it can influence property prices and determine the time by which properties will be sold.
Impact of low inventory
When the inventory is low, properties are likely to sell faster but at a higher price. A declining inventory level is an indication of buyers’ activity across existing and new properties while reflecting economic growth.
From a developer’s perspective, lower inventory may indicate a good demand for properties from buyers, significant cash flows and financial strength. It puts the company in a favourable position to launch new projects.
Impact of high inventory
With an increase in inventory level, properties may take longer to sell, reflecting a slowdown in demand while new launches continue to come up in the market. It can also mean sales at less than the asking price. The slowdown could be due to price appreciation in the market, reduced affordability of properties for end-users or higher interest rates. For a developer, high inventory levels can reflect construction-related problems that may have impact the project, locked cash flows and other financial problems.
How are inventory levels assessed?
Inventory levels are studied in three ways: absolute number (1 Lakh units), months of inventory (40 months) and rate of absorption (5%).
Months of Inventory
Months of inventory refers to the amount of time or number of months required to sell the entire existing inventory, given that no new supply enters the market. This method helps assess the type of market and estimate the correct time to buy or sell properties to maximise profit.
It is calculated through the formula:
Months of Inventory = Total units in a project or location in month X / Total units sold in month X
For example, there are a total of 50,000 units in the market (A) and the average sales in a month is 1,000 units (B). The months of inventory will be 50 months (A/B).
A higher number shows a slowdown in the market, whereas a lower number indicates faster sales.
Absorption Rate
Absorption rate means the rate at which units are sold or absorbed in a specific project or location. It is calculated by the formula:
Absorption rate = Monthly sales / total inventory
In the above example, the absorption rate will be 2%.
FAQs
What is the inventory level in real estate?
Inventory refers to the number of unsold properties in the market or a specific area at a given time.
How do you calculate real estate inventory level?
The months of inventory can be calculated by dividing the total inventory i.e., the number of unsold units in a specific project or location by monthly sales.
What is a seller’s market?
In a seller’s market, sellers tend to be less flexible with pricing or the offer they will accept as demand is more than supply. The months of inventory is typically less than five months and the absorption rate is more than 8%.
What is a buyer’s market?
In a buyer’s market, the months of inventory is typically more than seven months and absorption rate is less than 5%. This indicates the demand is less than supply, with more properties available for sale. The sellers are more flexible with pricing or the offer they will accept.
What is a healthy market?
In a healthy market, the months of inventory is typically five to seven months and the absorption rate is between 5% and 8%.
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