By The Numbers: Housing Inventory
As the nationwide housing crisis continues to unfold, one of the most important data points to watch is housing inventory. Housing inventory is examined by comparing the total number of listings in a given area to sales pace, resulting in a measurement of months’ supply. This number represents the number of months it would take to sell all the listed properties at the current sales pace, successfully integrating measures of supply (houses listed) and demand (houses sold).
As is often cited in the national media, inventory is way up around the country as foreclosed properties flood the market, while ready and able buyers struggle to scrape down payment money together or even qualify for a mortgage. Higher inventories put strong downward pressure on prices — more available properties and fewer prospective buyers create pricing competition that can send values spiraling downward. As we’ve seen in the last few years, areas with larger inventories (and more importantly higher months’ supply) have seen more precipitous declines. Areas that have maintained lower months’ supply have seen prices trickle downward, but haven’t fallen off the proverbial cliff.
Looking closely at historical months’ supply provides evidence that this measurement can actually be predictive for housing value trends, especially on a localized level. Looking at the graph below of sales activity in Santa Clara, CA, notice how increases in supply almost always precede price declines, and vice versa for supply decreases. Of course, the correlation isn’t perfect and there are many other factors at work in a given market, but by examining inventory for large changes in months’ supply, one can infer likely directional changes in price trends.
Source: Cirios Real Estate, MLS data
Predictive value aside, it’s clear that current downward trends in any market will not reverse until inventory is reduced. Until then, pay close attention to any numbers you run into regarding supply, as these can provide important insight into the timing of an eventual “bottom” of real estate markets.
At Cirios Real Estate, we closely monitor inventory at a variety of geographic levels, from county to neighborhood, for large moves in one direction or another.
If you’ve been eyeing a particular neighborhood, we can provide you with up-to-date analysis on inventory and a variety of other important factors in deciding when and where to purchase a home.
Tags: home prices, inventory, santa clara, supply