Housing Market Measurement
April 16, 2018 12:20 AM   Subscribe

I saw a tweet that said "if there's less than 4 months of inventory, it's a seller's [housing] market." I get the idea of inventory being low, but how do months factor in? And how do I get that number for my locality?

We're looking at being first-time homebuyers but we live in a small town in the north-north bay area of CA, and we're concerned about paying too much for too little, and losing money later. So I thought it'd be helpful to ask how we can determine the signs for a relatively good buyer's market. Thanks!
posted by circular to Work & Money (5 answers total) 2 users marked this as a favorite
The months supply number is also called Absorbtion Rate. Your area association of realtors may or may not publish that number on its website for the public. In my area in the North, the Absorbtion Rate is less than 1. This represents some record lows.

But really - who cares? If you want to buy a house, buy a house. You should be planning to live there for at least 5 years. You can’t time the market and if you are ok with what you get compared to what you get for your rent, go for it. Just don’t think of a house as an investment. Think of it as a place to live. If you gain or lose money on it when you sell - whatever. And if you stay a good long time you should do just fine.

Personally I don’t see this strong sellers market breaking for several more years. If you really want to keep renting till the Absorbtion Rate turns around - ok I guess but that also could be years from now and prices will probably continue to increase every year so you will pay more later. If you really want to try to time the market and you believe the Absorbtion Rate will turn around, you believe there’s a crash coming. How much will the gain in housing prices from now till this crash be? When the crash comes how low will it be compared to today? And the big question is - what will your financial position be when this crash comes vs right now?

Here’s my advice. Don’t try to time the market. If you want a house buy a house.
If you want to get a deal, ask a local Realtor what is unpopular right now. Will that style of housing be unpopular in 5 years? Can you find something not great and make it great? That’s something more under your control.
posted by littlewater at 1:39 AM on April 16, 2018 [4 favorites]

Say there are 1200 houses on the market, and 300 houses sell in a month - there's 1200/300=4 months of inventory. If there was only 100 houses selling a month, that represents 12 months of inventory, but if 600 were selling a month, that represents only 2 months of inventory.
posted by Homeboy Trouble at 6:42 AM on April 16, 2018 [2 favorites]

There are good answers above on why understanding months of supply makes sense - if houses are snapped up quickly, then prices go higher because people will get what they think they can get. Consequently, if sales are taking a while, prices go down as people often have to sell their home to do other things and thus months of waiting doesn't work for many people.

Here’s my advice. Don’t try to time the market. If you want a house buy a house.

I came here to sell the same thing - assuming that you're not trying to make a short-term play (i.e., planning on changing cities or houses again within 5 years) then the focus should really be about finding a house that fits comfortably into your budget and achieves your most pressing needs.

Within a buyers or sellers market, often times different types of properties may be bucking the market trend. For example - a particular neighborhood you like may be escalating if it's entry-level and has good schools while condos in a downtown and higher-end houses might be falling, and the result would potentially be a market that looks buyer friendly with high-level indicators but does not work for you as an entry-level buyer. Our realtor provided us with a more accurate snapshot of the sub market we were looking at that was completely different from the overall outlook.
posted by notorious medium at 7:27 AM on April 16, 2018 [1 favorite]

Since shelter is a basic need, one way to think about purchasing a house is that it's an investment against future rent increases. When people talk about losing money on the home they occupy, they tend to forget that they'd be paying rent anyway. Picking a number out of a hat, say you spend $2000/mo on rent and it goes up by $200 every year. After five years of that you've spent $144,000 on rent.

Now say you buy a house and your monthly payment for mortgage + taxes comes out to $2400/mo. After five years you've spent the same $144,000 (not counting any tax advantages of a mortgage). If the bottom falls out of the market in those five years, as long as your (paper) losses amount to less than $144,000 you're still ahead, even though it might hurt a bit if you have to sell at the bottom of the market.

If you stay in the house longer than five years or if you make extra payments on the way you'll start to build up equity even without the market moving. If the market goes up, you'll get equity along with it, although the caveat there is you always need a place to live and you can't really liquidate the equity at will. If your house goes up in value by $100K, it's a safe bet that all the other houses in the area you might want to move to will go up in value at the same rate. But if you relocate from CA to somewhere cheaper (for retirement, say), that equity could really reduce your housing costs wherever you end up. Conversely, if you get a new job in a hotter market your equity could barely make a dent: if your market has gone up by 10% but the other market has gone up by 50% in the same time frame, you won't have as much equity to show for your new home.

And to tie that back into your question, the housing supply and the rate of market appreciation are related somewhat, but the housing market isn't entirely rational. As housing supply tightens, buyers behave more irrationally, making offers over list price, getting into bidding wars, and so on. With a six month supply, buyers are at their most patient and rational. With a three month supply you might see bidding wars for specific houses, but it's still possible to find a house in a reasonable amount of time. With a one month supply (or less) people start making blind cash offers with no contingencies, and things get out of hand.
posted by fedward at 8:34 AM on April 16, 2018

The market is fairly hot, then a lot of people find it's a good time to buy, as you do. Conversely, when the market is slow, it might be for reasons that affect you as well as everyone else, say high interest rates or anxiety in a time of high unemployment. So one reason not to try to time the market is that it just might not work out well.

If you stay within the parameters of traditional and conservative banking, I think you will be fine. Back in the day, that meant 20% down payment, loan amount up to twice total wage/salary income. They are probably a bit more lenient now, but I can't quote you. Don't get stuck with an adjustable rate mortgage with an artificially low starting payment. (Not all ARMs are bad, though.)
posted by SemiSalt at 10:20 AM on April 16, 2018

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