Low Inventory Affects Home Prices
What is Low Inventory?
Low inventory is a relative term depending on how you’re comparing it. The comparison could be to:
- Total number of homes on the market last year
- Homes in a certain price range
- Homes in a certain area
In some situations, it’s a combination of all of those things!
Supply and Demand Varies by Area and Price Range
In any given market, inventories will fluctuate based on area and price range. The National Association of REALTORS® considers a balanced market to be six months’ supply of homes.
- Buyer’s Market – Homes take longer than six months to sell
- Seller’s Market – Homes take less than six months to sell
Most buyers and sellers probably feel inventory equilibrium is more like three month’s supply of homes
How Does Inventory Affect Home Prices?
During the Housing Bubble
- Demand decreased
- Supply ballooned to four million houses
- Prices dropped dramatically
Increased inventories due to foreclosures, banks’ revised lending practices and builder’s lack of new housing starts each contributed to the dramatically lower prices.
As Economic Condition Improved
- Banks have loosened their requirements
- Interest rates have remained low
- Foreclosures have slowed
- Inventory has gradually been reduced to approximately two million houses.
When demand is constant but inventory is reduced, price tends to increase because the same number of people are trying to buy a smaller than normal number of homes.
Inventory is Decreasing – Home Prices are Increasing
Based on the low mortgage rates that have been inching up each week in 2013 and an improving consumer confidence level, most markets are experiencing some increase in demand. With inventory decreasing, buyers in the marketplace can see that prices are increasing.
Just as signs of spring can be seen to be just around the corner, we can pretty much see which direction prices will be moving. Hindsight is 20/20, but we can’t purchase or sell in the past. We need to make decisions today on what we think will happen in the future.
If you’re curious to know what inventory conditions are for your specific market, contact me with the price range and area and I’ll send you a report.