How are home prices affected by the economy?


Understanding today's real estate market and how the market impacts the home selling process can be confusing.  This report is designed help you make the right decisions for your family by helping you understand the market and its impact on the selling process. 

The real estate market is a simple function of supply and demand. 

In real estate, supply is the total number of homes for sale in your price range.  The demand is the total number of buyers that will purchase a home in your price range on a month- to- month basis. 

The total inventory... divided by the new sales... is called the monthly supply of inventory. 

For example, a typical price range may have 25 homes for sale and only 5 new sales per month...  This means the market has a 5- month supply of inventory.   It would take 5 months just to sell all of the homes that are currently listed. Before you continue with this report, have your agent tell you exactly how many homes are for sale in your price range and how many buyers have purchased homes in the price range in the last 30 days.  Be very clear, there are not enough buyers for all the homes that are listed in today's market. 

Then understand the following:



 (0 to 1)...Month Supply of Homes...

Inventory is limited and all new listings are like "gold."   This quickly drives prices higher because multiple buyers write multiple offers at the same time.  Homes usually sell within a week or two of going on the market.   These sales are usually above the asking price so they become comparable sales for future listings thus driving prices even higher and those homes get multiple offers too... continuing the cycle.  This low level of inventory is normal at the peak of a market.

(2 to 3)...Month Supply of Homes...

Prices are going up steady but the bidding wars from purchasers willing to pay any price to get the only available listing disappear as there are more options for purchasers as the inventory grows.  The best listings still get multiple offers but a typical listing will simply sell near the asking price and take a bit longer to sell. 

(4 to 6) ...Month Supply of Homes...

Prices go flat and begin to fade because there are now in excess of a dozen homes available for each purchaser to choose from.  The media usually picks up on the change in the market at this point.  The negative press has a two fold effect: One, buyers start to wait thinking they may get a better deal in the near future and two, sellers and investors rush to the market thinking that they will lose money if they don't sell right away.  With the percentage of buyers purchasing homes each month on the decline and the number of listings available in the price range increasing... the monthly supply inventory will grow quickly during this phase.

 (7 to 15) ...Month Supply of Homes...

Prices drop as the number of homes each purchaser will have to choose from exceeds 20 and then 30 in each price range.  With that type of selection and the media on board, the offers take much longer to get and come in low thus driving future comparable sales down.  This will bring future listing prices down as well and just as the appreciation cycle continues, so does the correction cycle continue.  The remaining investors are putting hundreds of homes on the market and the new home- builders are beginning to drop their prices more dramatically in addition to offering purchasers incentives to make their inventory more competitive.  Again, the supply of inventory continues to grow. 

(16 to 20+) ...Month Supply of Homes...

Prices will fall much faster now that purchasers may have in excess of 50 or even 100 homes available in their price range.  Prices feel like they are free falling now that purchasers have so many homes available options in their price range.  Offers are coming in at ridiculous numbers and sellers are accepting them because homes are on the market for months.  Builders are offering both massive discounts in price and other amazing incentives.  Sellers are using price and much bigger price reductions as weapons against each other to try and gain a competitive advantage.


Remember, each price range or geographic area will have a different ratio. The "higher end" may be at a 20- month supply where as the lower end might be at a 12- month supply.  The same is true for different geographic areas.  You need to make sure that when your agent shows you market statistics during their listing presentation that it is area specific and price range specific. 

Question?  What is area specific and what is my price range? 

The answer is simple.  Where would a buyer looking to live in your area consider buying a home?  They will look beyond your sub-division but usually not form one end of the city to the next.

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