Inventory: The Key to Understanding Your Local Housing Market

Posted by Emily Ray-Porter Group on Tuesday, September 20th, 2011 at 10:35am.

By Brian O'Connell

NEW YORK (MainStreet) -- Want a quick way to figure out if your city or town is rallying on home values? Check out your area's home sales inventory.

A good, thorough look at local home inventories can tell you how much your home is really worth, and what are its chances of selling if and when you decide to put it on the market. By and large, home prices decline as local home inventories rise. That’s because with more competing inventory, home sellers in such locations often reduce the prices of their homes, which sets off a cascading effect among other sellers who are forced to lower the prices of their homes, too, to keep their chances of selling at a premium.

Housing industry research data bears this theory out. According to Altos Research, seven of 26 U.S. markets reported declining home prices in July, while home inventories in each of those seven areas were on the rise. Perhaps worse for local homeowners, Altos notes that housing inventories were up, on average, 1.59% in July. The firm also says that 21 of the 26 markets covered showed higher inventories that month, compared to 11 of those 26 in June.

But says the bigger picture is a bit brighter, as home inventories when looked at over a three-year period show a dramatic improvement.

“The housing market is still not yet back to normal, but the inventory component is moving in the right direction,” says chief economist Lawrence Yun. “There were 3.6 million existing homes on the market for sale, down measurably from the peak inventory of 4.6 million in the summer months of 2008. Taking into account the normal seasonal drop in inventory during the autumn to winter months, by January/February there could be only 3 million homes for available sale. At that point, the necessary balance would be provided for home prices to make sustained gains in most local markets because the corresponding months’ supply could well be in the six to seven-month range (even assuming there was no measurable pick up in home sales)."

Here’s a good rule of thumb on home inventories and the sales value of your home. The real estate firm Keller Williams uses a formula called the Days of Inventory (DOI), or “absorption rate”. The days of inventory number is derived from two key factors: active inventory and sold homes. According to Keller Williams, at 297 days, it would take roughly 10 months to sell every piece of inventory in a local market. A market with more than six months supply would usually qualify as a buyer's market, the realtor says. And a market with less than six months of supply is defined as a seller's market. Currently that DOI for the Dallas Downtown, Uptown, Turtle Creek market is 224.47 days. 

There’s no doubt that home inventories are a huge driver of local home prices. If you’re thinking of selling your home, check with a local realtor and find out what the inventory picture in your community looks like. If the inventory is six months or higher, you may find that the best way to get the price you want may be simply to wait.

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