Inventory levels define the state of the housing market. It is either a Buyers' Market, a Balanced Market or a Sellers' Market. To determine what market we are in, ask yourself, "how many months of housing inventory do we have?"
The Three Types of Real Estate Markets
Buyer's Market: When there is more than seven months of inventory.
Balanced Market: When there is between five to seven months of inventory.
Seller's Market: When there is less than five months of inventory.
Months supply of inventory loosened in 2014, helping ease price growth back to sustainable levels. We ended 2014 with 5.2 months of supply. This means that if no new listings hit the market, all the homes already listed would sell in 5.2 months.
In the last three years, we have been flirting with a balanced market and are getting closer to that reality. Balanced markets occur during the transition between a Buyers' Market and a Sellers' Market. So, if we are in a market marked as a transitional state, what does that mean for our clients and our business?
The aha: Real Estate is a Cyclical Business. Where You are Today is Not Always Where You Will be Tomorrow.
Gary Keller stated at Family Reunion 2015 that real estate goes in cycles and while we are in a good period now, agents should prepare for a slowdown in sales at some point. As Keller points out in his bestselling book, SHIFT: How Top Real Estate Agents Tackle Tough Times, there is a natural buildup of listing inventory from January through April and an offsetting decline in inventory from May through October.
If this is not a Buyers' or a Sellers' Market, how do your client's know if it is a good time to buy or sell? That depends. When you present this information to your clients, sellers may be inclined to wait for inventory to drop so they can sell at a more competitive price and buyers may want to wait for inventory to increase so they have more selection and price negotiation power. However, both buyers and sellers need to look at other factors, in addition to inventory, before they decide to move or wait.
With mortgage rates and home prices expected to rise in 2015, by waiting, buyers face potential affordability barriers while sellers ultimately risk being faced with fewer buyers as a result. All signs point toward making the move now.
The decision to buy or sell is a very important decision for your clients and they should never be forced to make a decision that doesn't sit right with them. As their real estate agent, your greatest value is acting as their local economist of choice by presenting them with the most current market facts and analysis to help them make the most informed decision.
In October 2014, Keller Williams initiated a new five part blog series, Market ahas. The quarterly series is designed to help our associates better serve as their clients’ local economists. The topics covered each quarter are mortgage rates, unemployment, price change, inventory, and GDP. This is the fourth article in the series for Q4 2014. Read more Market ahas here!