The recent housing boom that started in 2002 which fizzed out in the fall of 2006 had housing demand at an all time high. Credit was easy to get and property values were appreciating at an abnormal rate which created a great seller’s market. Interest rates were considered to be appreciatively low at the time, which drove up the demand side of the market up. That created a “artificial bubble” in the market.
The “artificial bubble” created in he housing market caused a few things to happen quickly. The “bubble” causes the house prices to become so high that regular salaries were no longer able to support these high mortgage prices. When the “bubble” burst, suddenly there was an over abundance of homes on the market, and the supply side started to build. We had too many homes available for sale, and not enough buyers to buy them, so the prices started to fall.
The number of months of home inventory tells if we have and an over, under , or balanced supply of homes available. This is done by calculating the amount of homes on the market , which is done frequently. It is calculated by the months inventory equals to the number of listing divided by the average number of sales each month over the past year. For example, let’s say there are 3,000 homes listed for sale and in the past 12 months an average of 600 homes were sold monthly, the months inventory equals 3,000/600 or a 5 month supply of homes available. Researchers believe a balance supply of homes is around 6 to 6.5 months of home inventory; that is where the equilibrium is.
The market is always changing, it sometimes switches from buyer’s to a seller’s market, and “visa versa. “ This decision is based on the current economical climate that determines the supply and demand scale of balance.
Some markets differ, but the balance nationally ranges from 5 to 7 months of housing supply depending on what area you are located. New homes average should be 3 to 4 months supply and the rest would be existing homes available. Where there is an over supply of homes, prices will fall; And with an under supply, prices will rise.
Buyers gained a competitive advantage as prices begin to fall. The has historically switched between an over or an under supply of homes over time, with brief periods of equilibrium in betmarket ween the market switch; And as you might already know, the appreciation during the balanced periods are more moderate.
