In this update, I’m going to discuss a specific and useful statistic at length, the Inventory / Sales Ratio and its usefulness when viewed with Sales Prices and indeed to indicate where Sales Prices are likely headed. I’ll also of course discuss the caveats and the limits of relying on statistics in a volatile economy and politically volatile world.
Let’s take a look at the Forsyth County GA Market viewed through Inventory / Sales Ratio.
Link to Interactive Chart: Inventory / Sales Ratio vs. Sales Price Rolling 12 Month Averages
The Inventory / Sales Ratio provides an indicator of the relative supply to demand condition in the real estate market. The larger the Inventory / Sales Ratio, the more relative supply there is of homes for sale than homes selling. Comparing the Inventory / Sales Ratio to Sales Prices shows that there is a predictive element in tracking the Inventory / Sales Ratio as the trend of the ratio moves ahead of moves in prices. This makes sense as greater relative demand leads to higher prices and vice versa. Additionally, an Inventory / Sales Ratio tipping point can be seen. For Forsyth County it appears that the tipping point is an Inventory / Sales Ratio around 11 (green line). This is the Ratio point at which prices stopped falling and began to stabilize even as the Ratio continued to fall. This chart uses a rolling 12 month average to smooth out the graph for better visibility of the trends.
What does this mean for Forsyth County Buyers? As the Inventory / Sales Ratio remains low, homes purchased today should have appreciation opportunity from an investment standpoint and given the leading indicator element of the Ratio, this opportunity should remain for some period of time even after the Ratio ticks up a bit until say the Ratio hits 6. Read on for more and particularly the section “Massive Market Events Destroy Trend Charts!” for a discussion of the weaknesses of “leading indicators” in massive market events.
What does this mean for Forsyth County Sellers? Now is a great time to sell your house as prices have recovered so significantly since the downturn. this should also remain the case for the near term given the high relative demand for homes vs. the number of homes available.
Let’s look at this in further depth using the chart using data through May 2016 (click link above for current updated chart).
Note that as the Inventory / Sales Ratio (blue line) climbed through to its peak in January 2011 of 14.5, Sales prices (red line) fell at an equally fast rate. Additionally, even as the Ratio fell back to around 11, prices continued to fall, note however, that the rate at which Prices fell slowed and the red line begins to flatten a bit until December 2011. At that point, when the Ratio fell below 11 (green line) [A], prices began to pick up a bit [A] though not strongly until September 2012 at which point prices have headed up quite strongly [B] as the Inventory / Sales Ratio continues to fall. This gives an indication that the Inventory / Sales Ratio is a leading indicator of home prices in the future.
Another indication of this correlation can be seen in the time period from October 2013 to December 2014 [C] where the Inventory / Sales Ratio flattened out around 6 (orange line). Now notice the slight flattening of the increase in the Average Price (red line) from October 2014 to September 2015 [C]. That is a lag of about 1 year between the market response of Prices after the Ratio trend. This again shows a predictive element in looking at the Inventory / Sales Ratio as a guide as to where prices are headed in the future. Also note that while the Ratio remained fairly constant prices did continue to rise. This is because the Ratio as a measure of the supply / demand balance remained low, meaning that supply was and remains low relative to demand. Consequently, it is reasonable to expect prices to continue to rise until such time as the Ratio increases (i.e. the blue line moves back up).
Massive Market Events Destroy Trend Charts! To be clear, this is a general indication and not something that can be used to glean precise timing on a month to month or even quarter to quarter basis. For example just because the Inventory / Sales Ratio falls this month, doesn’t mean that in 3 months prices will be higher. We all have experienced the volatility of events inside and outside the real estate market to know that things can change drastically in a short period of time. This can be seen in the early part of the chart above. Note that the Ratio remained low and only slowly began to tick up until October 2008, but prices had already begun to fall. This is a great example of how large market events such as the financial crisis starting in 2007 can change things quickly and blow up everyone’s expectations! Remember that expectations of the future drive markets of all types even more than current realities. By 2008, there was enough bad news and awareness that there was a huge problem in the real estate and overall financial markets that financing for buyers became very difficult and buyers in general got more skittish about making a move in the midst of financial turmoil. Consequently, demand fell even extremely fast and a glut of homes on the market had to reduce prices in a hurry to sell. Personally, my wife and I were blessed by just such a rapid market change and were able to buy our current house for 30% less than the original list price in May 2008.