What drives housing prices?

Today let’s take a look at what drives prices. You probably already know the answer: supply and demand. Simply put, price is determined based on how many people want to buy something and how much of that something is available.

In the world of real estate, months of supply is used as a way to measure how the housing market is doing. If you take the total number of properties for sale in a month and divide it by the number of sales for that month, you get months’ supply. So, if for example there were 30 homes for sale in the month of August and 10 of them sold, you would say that there is a 3 month supply of homes for sale.

Check this out:

September2013-13 edited

This chart shows us the impact of price based on months’ supply of homes. You can see that if there are 1 – 5 months of inventory, appreciation is going to take place and it is considered a sellers’ market. This is because if there are not a lot of homes for sale, prices will go up because the demand is high.

When there is a 5-6 months’ supply of inventory, we are in an even market. This is where prices remain relatively flat and stable.

A months’ supply of greater than 6 months is considered a buyers’ market. This is where there are too many houses on the market for the number of people wanting to buy homes. As a result, prices are driven down.

Since June of last year, we have been in the 1-5 months’ supply range–there were more buyers out there than houses for purchase. Part of this stems from so many people having been in negative equity. Many of these people may have wanted to sell, but chose not to because of their financial situations.

In April of this year, we passed over the 5 month mark and have continued there. This means that we are getting back to a more normal market. The very quick price appreciation that we saw should not continue and things should balance out. Here’s a graphic of the inventory from Jan of this year until July:

September2013-14 edited

Tomorrow we will look at specific data about inventory over the last year. See you soon!

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