As prices continue to fall and REOs continue to constitute more and more of what’s selling, several key indicators are showing that we are reaching a point of equilibrium in Sacramento County, where demand for homes has already turned a corner and where any additional decreases in price will only further fuel this demand.

Comparing residential properties from April of 2007 to April of 2008, the first thing one notices are that homes have lost about a third of their value in a year.  Average sold price per square foot declined 33.9% during this time, from $226.61 in April of 2007 to $149.84 in April of 2008.  This April the average home sold for $247,238, a 34.2% decline from last year’s average of $375,716. 

As we wrote about earlier, probably some 20% of this decline is a real drop in the value of any given home, while the remainder represents a statistical shift in what’s selling.  The markets that are hottest right now are those with the most foreclosures, where buyers are taking advantage of the bargains.  As a result, the more inexpensive markets are typically over-represented.

The Demand Curve in Action

The demand curve shows the relationship between the price of an item and the quantity of it that will sell.  As the price goes up, the number of units that sell goes down.

It also predicts what we see happening in fact over the last few months.  For each of the last three months in Sacramento County, unit volume was up not only from the previous month (which to some extent you’d expect because we’re moving further into Spring), but also compared to the unit volume last year.

By April this trend was particularly pronounced. In April of 2008, 1456 units sold in Sacramento County, a 46% increase over the 997 that sold in April of 2007.  In fact, you have to go back to June of 2006 to see unit volume this high.

Partly because of the increase in unit sales, but also combined with an absolute decline in the number of listings that expired, in April the expired to sold ratio was 42.2%, down from 78.7% the previous year.

Using the average “absorption rate” (unit sales volume) of the last twelve months, we have 9.24 months of inventory in Sacramento County. 

In Part II of this article we’ll discuss what’s selling and how the inventory breaks down according to category.

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