What Is Real Estate Inventory (And Why Should You Care?)
To some people who aren’t in the business, this talk of real estate inventory can sound a little weird at times. It’s not as if we have shelves with houses on them and we can order new ones from the factory, and I can personally guarantee you that no temporary workers are running around the streets with little handheld barcode scanners looking at the open house signs.
Still, real estate inventory is a key concept that helps us to understand how the market is doing.
What is Inventory
Inventory is simply the number of homes that are for sale now, expressed in terms of the average number of homes that sell every month. Sometimes we call the number of homes that sell every month the absorption rate. To get the absorption rate, simply pick a time period (the last six months, for example, or the last year), and divide. If 120 homes sold in the last year, then the absorption rate is 120 divided by twelve, or ten homes per month. So, in that same market, if there are 30 homes for sale, then the inventory is 30/10, or "three months of inventory".
By now you may be thinking, ok, that’s fine, number of homes for sale divided by the number of homes that sell every month. That’s great, but why should I care?
In the first place, inventory gives you a snapshot into the state of the market. For example, did you know that the traditional definition of a seller’s market is one that has less than six months of inventory, whereas the traditional definition of a buyer’s market is one that has more than six months of inventory.
More concretely, inventory is also an expression of how much competition there is with you when you’re buying or selling. Let’s say you’re selling, and you’re looking at homes that sold like yours and trying to see where your home should be compared to the average. In that case you can generally get a higher price for your home if there are two months of inventory than if there are twelve months of inventory. Conversely, if you’re buying, twelve months of inventory gives you more leverage with your price, but if there are two months of inventory, be prepared to be in a bidding war.
Finally, looking at the inventory numbers can tell you which way the market is moving. For example, in Sacramento County, generally inventory is falling at present, which is partly seasonal and partly the result of the huge upsurge in demand in 2008 over 2007.
So knowing the inventory numbers can help you understand not only where the market is now, but where it’s going!
