For some time now, we have attempted to shed light on the fact that pricing in today’s real estate market, as it is in the markets for every other saleable item, will be determined by the concept of ‘supply and demand’.
According to dictionary.com, “the relationship between supply and demand determines the price of a commodity. This relationship is thought to be the driving force in a free market.”
In real estate, supply and demand is represented as the current month’s supply of homes for sale (the number of homes for sale divided by the number of homes sold in the previous month).
Most real estate professionals investors & Realtors know, or at least have a good idea of, the month’s supply of inventory in their market. But why? Because of its effect on pricing moving forward.
While there is no steadfast rule that will apply to pricing in every category of housing, here is a great guideline by which to go:
- 1-4 months’ supply creates a sellers’ market where there are not enough homes to satisfy buyer demand. Appreciation is guaranteed.
- 5-6 months’ supply creates a balanced market. Historically home values appreciate at a rate a little greater than inflation.
- 7-8 months’ supply creates a buyers’ market where the number of homes for sale exceeds the demand. Depreciation follows.
When you looking at home values as either a seller or buyer, you should be prepared to ask your representative to show what the supply of, and demand for, homes is in the same category of home you are thinking of selling or buying. You should also ask about any regional factors that will likely drive change in those numbers (such as a potential shadow inventory of distressed homes or a projected increase in demand because of a new plant opening).
Every community has different mitigating factors that will affect the market. For example, some organizations still consider Tucson a “declining market”. “Not true”, says Jobe Repola, Mortgage Broker with Nova Homes Loans. “Not only are we busier than we have been in the last 18 months, home prices are moving up and fewer transactions involve foreclosures.”
NW Tucson in particular is improving at a quick pace. Over the last 6 months the market has flipped from a Buyers Market to a Sellers market with critically low levels of inventory. Builders are beginning to build again and new build developments that were on hold are selling homes. for more on the current Housing Report click Report.