Sacramento Real Estate Blog

One of the most important indicators that real estate market junkies like me look at is inventory.  If you’re not familiar with “inventory” in a real estate sense, it’s a pretty simple concept.  You look at how many homes sell every month.  Usually we like to use an average going several months back.  Then you simply divide the number of available homes by the number of homes that sell every month.  So if there are fifty homes on the market in a given area, and five homes sell every month, then there are ten months of inventory.

Why do we care?

Well, first of all, whether we’re in a “buyer’s market” or a “seller’s market” is traditionally determined by looking at months of inventory.  Most authors use the traditional cut-off of six months of inventory.  Less than that, and we’re dealing with a scarcity of homes — so we’re in a seller’s market.   More than that is considered a glut of homes, so we’re in a buyer’s market.  Of course, in reality the distinction is not so cut and dried, but when you get into the extremes it becomes more obvious.  If there are two months of houses to sell, that market is HOT.  If there are eighteen months, on the other hand, something is wrong.

This is definitely important information for sellers, because the number of months of inventory serves as a rough guide to how aggressive you should be when you price your home.  In a buyer’s market, homes priced near recent average sold prices will often do well.  A really hot buyers market is one where the prices are going up, and the mechanism for that of course is pricing homes above the average sold prices.  In a seller’s market, in contrast, prices are declining, so your target needs to be lower than the sold comps.  (I know, Mr. and Mrs. seller, you don’t want to hear that.  Sorry).

Type of Sale Matters

Today I spent some time working on my in-house real estate statistics engine, which lets me print out thumbnail market data by city, zip code, or county.  I added a feature to break inventory down by type of sale.

One of the ideas we have to constantly educate buyers about is that different types of sales behave differently.  Buyers of course like to think it’s a buyer’s market (hey, man, that’s MY market)!  And it is a buyer’s market — overall.  But what are most buyers buying?  Foreclosures, of course.  So how are foreclosures alone acting?  Like a sellers’ market!

Here for example is a printout of how Elk Grove has been behaving recently:

Inventory (Based on 12 months of prior sales)

Inventory (Based on 6 months of prior sales)

What does this show us?  Well, first of all it shows that Elk Grove has been moving into a more of a seller’s market situation in the last few months, since current inventory is lower if we take the last six months of sales as an average.

Looking at just non-distressed sales, however, over time we see that sellers who aren’t in foreclosure are experiencing the “buyer’s market” getting worse — with the average number of non-distressed sales falling over time.

Foreclosure sales are behaving like a very, very strong seller’s market, with less than two months of inventory especially if we look at recent sales.  We see this not only in the inventory numbers but also in our business every day.  Buyers are more often than not in multiple offer situations on foreclosures.  Full price and higher-than-full-price offers are not uncommon, as foreclosure buyers are often discovering that their first few low offers result in the home being sold to someone else.

The number of short sales that are closing, though improving slightly over time, is still abysmal enough that we have almost four years of inventory.  Today’s short sales are not tomorrow’s sales.  Today’s short sales are tomorrow’s REO, and the day after tomorrow’s sale!