Understand the Real Estate Market and Pricing

The market is a function of simple supply and demand. In real estate, supply is the total number of active listings and the demand is the total number of buyers purchasing every 30 days. (New Pending)

The total inventory… divided by the new sales… is called the monthly supply of inventory. For example, a typical market may have 25,000 homes for sale and 2500 new sales per month. That means the market has a 10 month supply of homes. 

Here is what happens to prices:

0 to 1 month supply of homes, prices are rocketing higher with crazy multiple offers.

2 to 3 month supply of homes, prices are going up steady

4 to 6 month supply of homes, prices go flat

7 to 10 month supply of homes, prices begin to fade

11 to 15 month supply of homes, prices fall

16 to 20 month supply of homes, prices fall hard

21 to 25 month supply of homes, prices free fall

 

Remember, each price range or geographic area will have a different ratio. The higher end may be at a 18 month supply where as the low end might be at a 4 month supply. In this example… Prices are dropping like a rock in the high end and holding steady in the low end.

 

The key is to watch this number each month. When the monthly supply of inventory reverses direction and starts getting smaller we have reached the bottom and started to come back. Prices will not return to appreciating levels again until the inventory has “sold off” to a 4 month supply again. (2010)

 

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