Real Estate Insight

How do I know if we’re in a buyer’s market?

A good rule of thumb is to use an indicator called the months of remaining inventory. It’s a ratio of homes for sale divided by the number of homes sold. This number gives you an idea of what the current market conditions are like.

So stated in another way, if no new homes came on the market how long would it take to sell all homes?

Let’s look at real data. The graph below shows single family homes in Orange County California. Last month in February we had 15.6 months of remain inventory. Essentially, stating that it would take over 1 year to sell every single family home on the market.

You can use the following as a guideline to determine market conditions:

0 to 3 months of remaining inventory Seller’s Market

4 to 6 months of remaining inventory Neutral Market

7 or more months of remaining inventory Buyer’s Market

Let’s look at more data that goes further back:

This graph shows 5 years of Orange County single home data. You can click on the picture to zoom in for more details. For the most part you can almost predict what is happening to the market place.

Also if we went back and looked up major events that had impact on the market you will find that it directly effects this ratio. We find that in San Bernardino and Riverside we’re seeing months of remaining inventory in excess of 2 years and in some places 3!

What does this mean for real estate prices? Well, you can be the judge and decide. If there is a lot of inventory and it remains high (that would indicate that Seller would need to sell, otherwise they would take their home off the market and wait) and the rate of home purchases place a months of remaining inventory past 1 year, how would motivated sellers usually compete? Price.

Hope this helps, would love to see your comments.

Brian Laughlin