So in the current real estate market place with unemployment increasing, interest rates fluctuating, stimulus packages being debated (and apparently passed in the Senate today), the banking system collapsing, and an overall the "sky is falling" mentality, do simple economic principles still help explain what's going on? In a word: yes.
We've all heard and used the expression supply versus demand. It's interesting in our industry as we embrace the Internet, statistical metrics, buyer & seller behavior patterns, home staging expertise, and any number of other factors to explain what's occurring in our markets when the simplest answer may be the most accurate (Occam's razor anyone?) In our quasi- free market economy, pricing should be a reflection of the relative supply and demand of a particular product. In our case housing inventory and purchaser demand.
One of the reports I run on a regular basis to get a sense of what the market is doing is a very simple supply and demand analysis based on certain price points. Supply is measured by the number of new listings occurring during a specific time period. Demand is measured by the number of properties which go under contract (not necessarily sold) during that same time period. I use under contract to measure demand as other metrics involve any number of subjective assessments to be done. At least with under contract activity I know a qualified buyer made a legitimate offer which was accepted by the seller (after their negotiations were completed). Understanding an under contract may fail at some point during the due diligence process, but at least we knew we had a real buyer who wanted to buy something.
For this illustration, I used calendar year 2006 data (which represented our peak year for sales activity and price point appreciation) compared to the most recent: 2008. This illustration, albeit simple, is quite profound in demonstrating the impact of supply and demand on our market.
In terms of listing activity every price range but to the lowest experienced increases in inventory levels between 2008 and 2006. Obviously part of the drop in the lowest price range is that appreciation levels over the time period moved a good portion of that inventory into the next price bracket. Even with that, the county as a whole experienced a slight but measurable increase in overall listing activity. The demand side however, dropped significantly in 2008.
The reasons for this precipitous drop is fodder for another blog post and discussion (e.g. increasing unemployment, stagnant income growth, the seizing of the credit markets this fall, etc). For purposes of this discussion, suffice it to say that demand dropped while supply increased. Everyone who's even dabbled in economics 101 understands that is a recipe for downward price pressure.
This then begs the question, "when will we hit the bottom?" My response to clients has been and will continue to be when we begin to see supply and demand moving toward one another. More specifically, when demand (as represented by purchasing activity) begins to move back up. So far through the first half of the first quarter we have yet to see any change in the demand side of this equation, however, this is the metric I will be watching closely going forward.
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