If you’ve spent any amount of time looking into buying or selling a home in Chicago, then you’ve probably heard the term “inventory” come up with some regularity. Maybe you’ve discussed “months’ supply of inventory” with your real estate broker, or read about inventory in a discussion of local market trends. 

But what does inventory really mean when it comes to real estate - and how is this crucial concept impacting buyers and sellers here the Chicago market? 

Inventory In Real Estate, Explained

In real estate, we often look to a metric known as months' supply of inventory to take stock of the housing market in a given area. Here in Chicago, where real estate conditions can change from neighborhood to neighborhood (or even block to block), we often devote a great deal of time looking into months’ supply of inventory for a given area throughout the year. 

Simply put, months’ supply of inventory is measured by taking the ratio of houses for sale to houses sold in a given area in a month's time. Gauging this ratio gives us a theoretical measure of how long all the available inventory would last given the current sales rate if no additional houses were built or newly listed in an area. In order to do this calculation, it’s also important to have an understanding of how much total inventory there is in a marketplace; this refers to the raw total number of active listings, or properties for sale. 

Understanding what inventory means and how it works is vital to both homebuyers and sellers alike – particularly in a market like ours here in Chicago, where many analysts and consumers are quick to blame “low inventory” for a lot of their real estate woes. But what exactly does it mean to have low inventory in a real estate market? And does Chicago really have a unique low inventory “problem?”

What It Does It Mean to Have “Low Inventory?”

One of the biggest reasons why it’s important to have a firm grasp on inventory is because, for those of us in real estate, understanding inventory is key to knowing whether you’re operating in a market that is more beneficial to buyers or sellers.  

At Real Group, we rely on a simple metric when looking at months’ supply of inventory for the Chicagoland marketplace, or for an individual neighborhood. Generally, we believe that a four-to-six month supply of properties indicates a market that is well-balanced in favor of buyers and sellers. 

If we see that months’ supply of inventory is reaching higher than six months, we expect to see a “buyer’s market,” in which choice is plentiful and prices drop in order to encourage competition. When months’ supply of inventory falls below four months, this makes for a seller’s market, which may result in higher sales prices as buyer demand exceeds the available supply of housing. 

Looking at the housing market broadly, having a constrained or tight level of inventory certainly can present some challenges. While markets with low inventory can lead to rising sales prices (which may benefit sellers), those higher prices may dissuade some potential buyers from ever entering the market. If prices grow too high, too quickly, this can also lead to fewer sales in a given area. Finally, for buyers, searching for a home in a low inventory market can be daunting, and may require acting incredibly quickly or even entering a multiple-offer scenario in order to compete for available properties. 

What Does Inventory Look Like In Chicago?

As we’ve noted above, it’s important to understand that Chicago is a city of neighborhoods, and each one operates quite differently. The area is not a monolith, and it’s worth investigating your favorite neighborhoods in more depth. For a more granular look at housing market data, we encourage you to check out our local market stats roundups, many of which are available here.

With that being said, “inventory” is a buzzword you’ll hear quite often in the Chicago market, no matter where you’re looking. For some time, Chicago has seen a relatively limited amount of available inventory available - but there has recently been an indication that this metric could be on an upswing. 

Looking back, January of 2017 saw the lowest recorded number of homes in the Chicago market in 10 years, according to Crain’s Chicago Business. In Illinois more broadly, reporting from Curbed Chicago saw a decline in available inventory from 2008 to 2016. 

More recently, however, data shows that the total amount of available inventory in Chicago is on an upswing. For instance, research from Chicago Magazine indicates that the amount of inventory was actually up in summer 2019, compared to the same period from 2018; this makes for a “balancing” market, “providing more options to shoppers while also creating competition for sellers,” as writer AJ Latrace notes. 

We can see this trend play out by looking at data from the local MLS (Multiple Listing Service):

Looking at months’ supply of inventory in Chicago, we saw a steady rate of about 3.8 months throughout 2017 and 2018 - and a peak of 4.2 months in late 2019, after a period of steady growth. This indicates that there was more available inventory in 2019 than at any point since 2016. In our view, this means that our local market is fairly balanced, with significant advantages to offer both buyers and sellers as we move into 2020. 

Again, though, it’s important to understand that this graph doesn’t necessarily paint a full picture. There are micro-trends worth noting, as well. For instance? Here in Chicago, industry analysts are seeing lower levels (and more competition) for mid-level housing stock, “while inventory of high-end homes continues to pile up,” as Latrace puts it. Similarly, there are many neighborhoods where inventory is balanced, some in which inventory levels are lower, and still others where available inventory outpaces demand. 

When considering inventory in the Chicago market, it’s also important to look to national trends - and understand that our area is far from an outlier. Inventory is considered to be tight in many areas across the country, where prices and total sales (in units) are forecast to drop significantly in 2020 - whereas Chicago’s market is largely projected to be fairly level in the year to come. 

At the same time, the end of 2019 saw significant movement in the construction realm, as home builder sentiment increased to its highest level since 1999. The number of new building permits issued increased to 1.46 million in October 2019, the fastest rate of change since 2007. Realtor.com also projects housing starts to increase by 6 percent in 2020, while the National Association of Home Builders (NAHB) anticipates a 4 percent upswing in single-family construction. All of these are signs that inventory levels may be in the early stages of balancing out, nationwide.

Ready to Start Exploring the Chicago Market? 

It’s hardly all doom and gloom here in the Windy City. Mortgage interest rates fell significantly in 2019, and are expected to remain consistently low through 2020. Meanwhile, the median sales price for homes in Chicago has been in the midst of a steady increase for years now; market watchers saw an uptick in homes going under contract in late 2019, and many local experts are projecting a bustling spring season. 

Want to learn even more about our dynamic market here in Chicago? Feeling encouraged to start your home search, or put your property on the market? That’s where we come in! Drop us a line with any questions or concerns about buying or selling in Chicagoland. We’re here and always happy to lend guidance and support for all things real estate.