Understanding The Dynamics Of Inventory

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By Jeffrey S. Detwiler
President and Chief Operating Officer
The Long & Foster® Companies

 As the real estate market recovers, a look at what tight inventories can mean for buyers and sellers

After what was easily the longest economic downturn in recent times, momentum is building and national headlines are trumpeting news of economic gains. In the residential housing sector, these swiftly-changing market dynamics certainly offer more opportunity for buyers and sellers than what we’ve experienced in recent years—but the recovery-driven changes in real estate have also left some consumers’ heads spinning. In some areas of the Mid-Atlantic region, those who want to buy houses aren’t always finding options that meet their needs at the price point they were expecting and sellers are sometimes surprised to find that their homes are on the market weeks or even just days before they receive offers. As the recovery from the rockiest housing market in generations continues to gain traction and solidify, the fundamentals of supply and demand will not only help us understand the current relationship between buyers and sellers, but also the relative bargaining power of each.

Inventory of homes for sale, in particular, can tell an interesting story about the dynamics of a local housing market. Across the country, shrinking inventories are putting sellers in the driver’s seat as the number of appropriately-priced homes is falling short—in some cases, far short—of the demand by would-be buyers who are in the market for a new home. The National Association of REALTORS (NAR) reports that inventory was nearly 25 percent tighter in June compared to the same month last year and 25 percent lower, year-over-year, in July. This continues a multi-year tightening in many markets throughout the region.

Being aware of how inventory impacts local residential real estate conditions is valuable to both buyers and sellers, and because the environment is changing quickly and varies considerably by market, consumers who arm themselves with local market data and a well-informed Realtor are likely to find historic opportunities to reach their homeownership and/or investing goals.

SELLERS: POSITIONING FOR SUCCESS

Given the downturn and the years of headlines of depreciating home values and underwater mortgages, it’s not surprising that many would-be sellers may be wary about jumping into the housing market. But many markets across the Mid-Atlantic region and the country have seen a turn of the tide, presenting sellers with considerable opportunity.

In Washington, D.C., for example, homes are selling in less than 43 days, on average (as of July 2012). Inventory in the metro area has tightened significantly and the Long & Foster agents assisting buyers and sellers in this area report that competitively-priced homes are selling very quickly—many times with multiple offers. Because buyer demand is outpacing seller supply in Washington, D.C., sales prices are climbing and sellers are receiving a higher percentage of their list price.

Similar conditions exist in marketplaces throughout the Mid-Atlantic region, including Baltimore, Philadelphia, and Richmond, which have also seen inventory tighten 27 percent, 18 percent, and 27 percent respectively, compared to the same time a year ago. Although these markets are in a slightly different phase of recovery, we’re likely to see them follow the D.C. trajectory into the future.

Given these market dynamics, now could be an ideal time to list a home and perhaps move up to the dream home that suits your lifestyle preferences. Here are a few things to keep in mind if you’re looking to make a housing-related change:

Learn the Market

We’ve all heard the adage that real estate is local—but never before has this statement been truer than it is today. The economic downturn affected different areas of the country in different ways, and real estate varies significantly by market. What national headlines share about the health of the residential housing market is unlikely to be a direct reflection of what’s happening in your own backyard.

To keep consumers well informed about current market conditions, Long & Foster offers local housing market reports (www.LongandFoster.com) that include data about active inventory levels, median sale price, and how long homes remain on the market before selling, in addition to other information. Evaluating this up-to-date data may indicate to you if there is opportunity in your local marketplace, and could be a reason to consult with a Realtor about listing your property.

Price it Right

It’s important to select a Realtor with extensive experience selling in your area. Market conditions are changing fast and you’ll need the assistance of a professional who can assess your property in the context of recent sales and available inventory. In a limited inventory situation, comparable sales and pricing data from six months ago may not be as relevant, so taking the time to research current market conditions is an investment of time and energy that is likely to pay off.

Pricing your home competitively will attract more interest and will strengthen your negotiating position as offers come your way for consideration. In some cases, this may translate to a higher purchase price, but it can also mean more favorable terms in the contract—giving you more flexibility as you transition to your next home.

Resist the urge to over-price your home as you only have one shot to be new to the market. It’s a delicate balance to get pricing right, which is why you’ll need an experienced Realtor to work with you on a strategy that fits your property and goals.

Be Ready

In areas with limited inventory, buyers are keeping a close eye on new listings coming on the market, according to our sales professionals. You’ll want to make sure that your home or property is in “showing worthy” condition as soon as you list it. Depending on market conditions in your area, you may have showings right away, and you’ll want to be prepared to put your best foot forward to focused and interested buyers.

Look at your home through potential buyers’ eyes—the total value proposition is a combination of pricing and the condition of the property. Work with a professional who can tell you which investments will make your property stand out among the current competition on the market.

BUYERS: BE EDUCATED, PREPARED

With moderated prices and historically- and impressively-low mortgage rates, today’s real estate market presents some once-in-a-generation opportunities for well-qualified home buyers and investors. But as many markets are shifting from the buyers’ market of the last few years to a more balanced environment, it is advantageous to be prepared and educated about the local housing market as it exists today.

Adjust Expectations

Just as sellers should reference current, local market information when determining competitive listing prices for their homes, buyers should also be educated about the market in which they’re hoping to conduct a transaction. Just because a friend or co-worker benefitted from a short sale or foreclosure transaction last year to receive a discount on an investment property does not mean that a similar opportunity or price discount would be available today. Having clear expectations will help buyers understand what they’re likely to pay in today’s market, and adjust their investment tolerance threshold accordingly.

The good news is that historically-low mortgage rates help buyers stretch their buying power with lower total cost of ownership and lower monthly payments.

Be Competitive

Contracts with competitive offers and fewer conditions are likely the ones that will stick in many of today’s housing markets. Buyers with financing already in place are likely to be a safer bet for sellers than buyers who have yet to secure the financial side of their offer.

Our sales professionals also point out that money is not the only way to stand apart from a crowd of competing buyers. Sometimes bringing flexibility to sellers—like a later move-in date or a faster closing date—will be more valuable than a slightly higher sale price offer.

Prioritize

It’s easy to understand why some well-qualified buyers are finding themselves frustrated in some home search situations—the financing scenario is ideal, prices have moderated from historic highs, and the perception of distressed/underwater sellers certainly suggest a potential bargain and easy transaction to be had. The lack of quality inventory—which is significant in some areas—has left many buyers to discover that they’re working harder to find a home that meets their expectations. With the support of a real estate professional, however, many buyers are finding options worth evaluating.

Today’s buyers can still take advantage of historic homeownership opportunities, especially if they are equipped to prioritize and focus on the “must haves” of the ideal home or investment property. These priorities coupled with a knowledgeable Realtor who has a solid understanding of current market conditions in the local area can provide buyers and investors with a strategy for knowing when to jump in with an offer and at what price.

Buyers should keep in mind that while pricing has moderated, many experts believe prices will rise—making this still a good time for many to consider buying or moving up to their dream homes.

CHOOSE YOUR PARTNER WISELY

With swiftly-moving housing market dynamics, it’s more important than ever to partner with the right team of real estate professionals. Working with the right real estate company is no longer about simply placing a yard sign in front of a house or driving around a neighborhood to see what’s available in the market. Today, partnering for success will not only help you overcome any market condition challenges that may exist, but it will also bring to the table the experience and expertise you need to help you reach your long-term homeownership and investment goals.

About the author

Jeffrey S. Detwiler is president and chief operating officer of The Long & Foster Companies, parent company to Long & Foster Real Estate, Inc., the largest independent real estate company in the U.S., and Prosperity Mortgage, a joint venture with Wells Fargo. From extensive, neighborhood-level market information to Long & Foster’s core services companies—providing mortgage, settlement, insurance and property management services in a streamlined manner—Long & Foster offers the services necessary to make today’s real estate transactions manageable for owners and investors.

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