The experts will tell you that success in selling any product has everything to do with Supply and Demand. In real estate terms that can be measured in terms of Months of Inventory. The rule of thumb is that a balanced market contains between 5 to 6 months of inventory. Anything less than that is a Sellers Market, anything more than that is a Buyers Market.
If you think about it using the Supply and Demand theory, when there are more homes for sale than there are buyers, buyers are in control because they have the luxury of taking their time looking. If one house sells because they wait, no problem, there are several more out there just like it. When there are fewer homes for sale, buyers must act quicker or else they may lose their favorite home and there are fewer other homes out there to choose from. Pricing in a Buyers Market tend to go down as Sellers try to do anything to get their home to “be the one chosen”. Sellers Market has the opposite effect on pricing. Fewer homes to sell equates into being able to get more for the home as many times more than one buyer wants the same home and a bidding war erupts.
You can see this theory in practice at the hardware store. The weatherman tells us there is a blizzard coming… all of a sudden snow blowers and shovels disappear from the shelves. When there is a short supply of any product, it’s value rises… because there are more people wanting it. And more people wanting something creates a sense of urgency. This in turn causes people to be willing to pay more for the item that they could have paid LESS for in different times.
The chart above shows this exact process in action. Much of 2009 was in an “Even Market” where supply and demand were fairly balanced. This was also during the time period where the Federal Government had a tax credit incentive in place to encourage buyers to purchase homes. The spike you see at the end of 2009 is a result of the tax credit extension announcement and the buyers then waiting for January of 2010 when the spring market picked up. Buyers entered the market heavily and even to the point where for one month, it became a Sellers Market. The instant that the stimulus ended, the buyers were no longer under an artificial rush to purchase and literally overnight, the market went from being a Sellers Market back to a Buyers Market with plentiful inventory. Without the Federal Tax Stimulus, I believe that home prices in 2009 would have fallen and fewer buyers would have purchased homes. That’s my opinion…. some people say that the stimulus didn’t do anything but simply push some buyers into buying earlier than they had planned.
What will 2011 bring? I think that all depends on our economy and jobs. If consumer confidence returns, which many analysts are now saying it is and unemployment numbers continue to go down, I believe that we will see a normalization of our market and a return to an Even Market situation. Home prices should remain steady and increase slightly if this occurs. 2011 is the year we will establish our new normal. Without tax credit stimulus. It’s like finally being off medicine.