As I prepare our Q3 company market report, I'm bothered by one traditional statistic. The six-month inventory rule has been the cornerstone for real estate professionals seeking to understand market dynamics for years. The concept is simple:
- Sellers Market: Less than six months of inventory
- Balanced Market: Exactly six months of inventory
- Buyers Market: More than six months of inventory
Traditionally, a market with less than six months of inventory is seen as favorable for sellers, whereas one with more than six months leans towards buyers. A six-month inventory suggests a balanced market where neither party holds a significant advantage.
The Ever-Changing Market Landscape
I'm questioning whether this long-standing rule holds water in today's fluctuating market. Specifically, the ultra-low interest rates from the past few years have left an indelible mark that we cannot ignore.
The Unintended Consequences of Low Interest Rates
When interest rates were at historic lows, it was a bonanza for buyers. However, those same low rates have created an unexpected situation: a hesitancy among existing homeowners to sell their properties. Many homeowners, unwilling to give up their low-interest rate mortgages, have opted to stay put, thereby contributing to an inventory shortage.
This shortage has a double-edged effect: it supports higher prices and causes homes to sell more quickly than usual. As a result, the traditional six-month inventory marker may be skewed, presenting what appears to be a stronger seller's market than might exist under 'normal' conditions.
The Hangover Effect of Previous Low Rates
Even as interest rates rise, the aftermath of those historically low rates remains. Homeowners who locked in low rates are still reluctant to move, keeping inventory low and potentially skewing traditional metrics like the six-month rule.
Price Range Sensitivity and Luxury Properties
One often overlooked variable is the sensitivity to price range, especially regarding high-end and luxury properties. Luxury markets often have different dynamics, which can skew the six-month inventory figure. In higher interest rate environments, such properties may stay on the market longer, not necessarily because of lower demand but because they cater to a smaller buyer pool that is also more rate-sensitive. This creates a nuanced layer that traditional inventory metrics may not accurately reflect.
Time for a Revised Approach?
Given this complex backdrop, is it time for us as industry professionals to reconsider the metrics we use to evaluate the real estate market? Should we incorporate additional factors—like current and past interest rates, local economic conditions, and even employment rates—into our analysis?
As we navigate these uncertain waters, the tools we use to guide our clients—whether they are buyers, sellers, tenants, or landlords—need to be as accurate and comprehensive as possible.
I'd love to hear what other real estate professionals think. Is the six-month inventory rule still your go-to metric, or is it time to include other variables to present a more nuanced and accurate picture of today's real estate market?
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