As Inventory Goes Down, Prices Go Up

We all learned about it in economics class in middle school or high school. It's one of the most basic indicators in business, but what exactly does it mean for today's local real estate market? I'm talking about good ol' supply and demand.

"If demand increases and supply remains unchanged, prices will rise. If supply increases and demand remains unchanged, prices will fall." I'm sure we all have heard this a few hundred or thousand times. The most recent MIBOR (Metropolitan Indianapolis Board of Realtors) market statistics came out on Monday and I wanted to dig into the topic a little more. It might be a little nerdy, but it's really important. I'll try not to make it boring.

I've been recently explaining to a lot of people that the local housing inventory is historically low, and that there are plenty of buyers out there looking for good houses. To put some real numbers behind that instead of me just saying it, in the report released on Monday, there were 11,348 houses currently active on the market as of the end of March. That number is down 2.4% compared to this time last year, 8.2% compared to 2013, 23.9% compared to 2012, and 33.2% compared to 2011. Are you starting to believe me yet?

So, there we have the supply line of the S&D graph. The other line in the graph is the demand line, or in our case - the buyers. Based on MIBOR's numbers over the last several months and years, most of the buying indicators are going up. The number of pending sales is up, the number of closed sales is up, the average and median sales price is up.

One driving force is that mortgage rates, too, are at historically low rates. According to Freddie Mac, these last few years have been the lowest mortgage interest rates since the Federal Reserve began tracking the numbers in 1971. The average 30-year fixed-rate mortgage in 2014 was 4.17%. That's down 28.6% compared to 2004 when the average rate was 5.84%.

Finally, we take a look at the two lines of the S&D graph together. In supply and demand, equilibrium is the point at which supply and demand intersect or are equal. In real estate, most agree that a 6 month supply of inventory is considered a balanced market.

"Months supply" is a real estate term calculated by taking the total number of active listings and dividing that by the average monthly number of pending sales. As an example, in a balanced market there would be 12,000 active homes and 2,000 average pending sales. 12,000 / 2,000 = 6 months supply. The higher the number, we have more supply than demand (buyer's market, lower home prices). The lower the number, we have more demand than supply (seller's market, higher home prices). Right now we have 4.5 months supply, meaning there are more buyers looking to buy houses and fewer houses from which to pick. In 2011, that number was 9.7 and has been decreasing since.

Whew! We made it through numbers and statistics and nerdy stuff! I hope that was helpful and made sense, and if not, here's a quick snapshot takeaway:

Bottom Line

- The number of houses on the market is historically low, down 33.2% compared to March of 2011.

- The number of buyers is up. The economy is recovering, people are able to afford homes.

- Mortgage rates are also historically low. You can afford more for your money.

- We have 4.5 months supply of inventory. 6 is balanced. Higher is good for buyers, lower is good for sellers.

- The market is heating up! Houses are selling fast, many within days. It's a great time to list a home.

- Even though it's becoming a seller's market, buyers can still find good value. Greater Indianapolis continues to grow!

If you know anyone looking to buy or sell, please send them my way. I would love to have a chance to help them!