Most people have at least a cursory understanding of the residential real estate market simply by reading news headlines.
The media often report general trends across the nation regarding the increase or decrease of home prices and mortgage rates, and how this may affect the average American homebuyer’s ability to purchase or sell a home.
But if you have felt a gap between these general numbers and statistics and your personal experience, you are not alone.
Chances are, the current state of your local real estate market is much more nuanced than what the news headlines are reporting – if not vastly different.
So you read the headlines. Do you buy? Do you sell?
Understanding general real estate patterns can be helpful, albeit not always conclusive in helping you make an informed decision.
General Patterns and Trends of the Real Estate Market (Stuff we can all agree on)
Aside from the real estate boom and crash in the United States in the late 80’s, and again circa 2005-2008, the real estate market is generally somewhat predictable.
Perhaps “predictable” is too lenient, as I am mindful of those who were blindsided by a quickly toppling market in 2008.
But most would agree that by studying historical data, patterns and trends emerge, much the same as the stock market.
When looking at real estate value trends over time, generally speaking: the value of real estate will go up.
Another common pattern in the real estate market is that more homes are sold during the summer months, when most educational institutions are on break.
But similar to how the national economy and local economies are interrelated, or national politics and local politics, the same is true for real estate markets – they are related, but still independent of on another.
Local Real Estate Market Trends
Local real estate markets can be impacted by factors such as:
- local economic and job growth
- opportunities for higher education (or inversely: brain drain)
- proximity to specific types of industry, and
- local politics.
How do all of these influences affect your county, city, and neighborhood?
It’s no surprise that cities vie to host new campuses for huge companies like Apple and Amazon: the effect on industry, the local economy, and real estate prices would be staggering.
There are debates in our city halls between those who are growth-focused and others concerned about gentrification or loss of the character and charm of local culture.
The fact is, your local real estate market is highly sensitive to your local ethos, and with all of its complexity, how do we make any sense of it?
The answer: know your local numbers.
Regardless of the varying causes in your community affecting home sales and prices, what is the cumulative impact and what does the resulting data look like?
Know Your Local Real Estate Market Numbers
The number of home sales in your community, during a given time, compared to the number of active listings, is a key concept in real estate called inventory.
Understanding inventory is crucial to understanding your local real estate market.
Inventory – What is it?
Inventory, also called absorption rate, refers to how long it would take to sell all existing homes in your local market if no new properties were placed on the market.
For example, in a community with an inventory of 3 months, it would take 3 months to sell all of the existing homes on the market if no additional properties were listed during that time.
Is Your Real Estate Market a Buyer’s Market or Seller’s Market?
Inventory is helpful for deducing whether your neighborhood is a buyer’s market or a seller’s market.
Commonly accepted definitions of inventory are as follows:
- 0-3 Months of Inventory = Lowest inventory = Highest home prices = Extreme seller’s market
- 3-6 Months of Inventory = Low inventory = High home prices = Normal seller’s market
- 6-9 Months of Inventory = Balanced inventory = Stable home prices = Equal bargaining power
- 9-12 Months of Inventory = High inventory = Low home prices =Normal buyer’s market
- 12+ Months of Inventory = Highest inventory = Lowest home prices = Extreme buyer’s market
Real estate inventory in a given month is calculated as follows:
- take the number of actively listed homes that month, and
- divide that number by: the number of home sales + the number of pending sales for that month
Some calculations of inventory exclude pending sales.
Perhaps it’s the lawyer in me, but I am in the camp that heavily weighs pending sales in a calculation of inventory because pending sales are those in which all “contingencies” have been removed, meaning there is no backing out of the deal without exposure to litigation.
How to Use Inventory to Help Take Advantage of the Real Estate Market
Intimate knowledge of your local inventory is crucial when negotiating a real estate transaction.
The best real estate negotiation is made with as few surprises as possible, and without being pressured to bend one way or another unnecessarily out of ignorance or fear.
The more knowledge you have in a real estate negotiation, the more empowered you are.
Most realtors will “pull comps” to help you understand the value of your property. “Pulling comps” means comparing the value of your home to other recently sold homes in the same or similar geographic region for comparison and to ease in the valuation of your home.
But how do these numbers relate to the real estate trends in your region over a period of time, and how can that inform today’s transaction?
Is inventory the same in all regions in your city? What does inventory look like at different price ranges?
These inventory-centered questions (and their answers) can greatly inform your strategy for buying or selling real estate.
Real Estate Market Report
As a real estate broker in Laguna Beach, I am personally interested in Laguna Beach inventory and how it affects my clients.
If you would like to sign up for my monthly real estate report, text “LagunaHomes” (no spaces) to 44222.
To contact me for help with a Laguna Beach real estate transaction, click below.