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What Is The Relationship Between Home Values And Inventory?

by | Apr 14, 2016 | Articles, Market Reports

There is a common question among both Realtors and their clients: How exactly does the inventory of homes in our market affect home values? There is in fact a distinct relationship between inventory and home prices, and I have compiled over a decade of data to show you the trends between these important figures.

To start, let’s note that the inventory in the Portland metro market hit a low of 1.6 months in June 2015, with the average home being $370,000. That’s the lowest inventory we’ve seen since Summer of 2005. However, the last peak in pricing happened two years later in 2007 where the average home was at $352,000. By this point inventory reached a near-balanced 5 months as more homes came on the market.

What’s interesting here is not these specific points in time, but what happens in between them. In between 2005 and 2007 as prices increased, so did the inventory. Then in 2008, inventory took a steep climb from 5 months up to 9.5 months, meaning homes were now sitting on the market for what felt like forever. The average price in this market was $348,000, which is only fractionally less than the peak the year before, despite the great climb in number of homes on the market. This shows that there is a notable lag time between changes in inventory and changes in pricing. Now flash forward through 2009, ’10, ’11, to 2012, where the inventory had lowered to 4 months, and the average price was $285,000. That price is almost the same as  in 2005, where the inventory was at an all-time low.

As we continued through 2013 and 2014 prices rose as inventory decreased, bringing us to 1.6 months in 2015. So there is a clear pattern here with supply and demand, and how peaks in pricing follow peaks in inventory with a lag time of about two years. Now that we can see this trend, it is easier to predict what pricing and inventory will look like in 2016 and 2017. I predict that the inventory will increase due to our current high home prices, and as that happens the market will start to balance out making it easier and less competitive for buyers and their agents alike, besides that homes will be less affordable since prices are expected to continue increasing. Once we reach a significant amount of inventory, more than six months, we will likely see prices begin to level off and the current trend will slow down just as it has in the past under similar circumstances.


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