For some time now, we have attempted to shed light on the fact that pricing in today’s real estate market will be determined by the concept of ‘supply and demand’. If supply continues to increase and demand softens (or even remains constant) prices will continue to fall. Even the National Association of Realtors (NAR) has acknowledged this to be true.

The supply of inventory in the real estate industry is defined by the current months’ supply of homes that is available for sale. There are no steadfast rules that will apply to every category of housing. However, here is a great guideline by which to go:

• 1-4 months’ supply creates a sellers’ market where there are not enough homes to satisfy buyer demand. Appreciation is guaranteed.
• 5-6 months’ supply creates a balanced market where historically home values appreciate at a rate a little greater than inflation.
• 7-8 months’ supply creates a buyers’ market where the number of homes for sale exceeds the demand. Depreciation follows.

Where do we stand today?

According to NAR’s most recent Existing Sales Report, there is currently a 10.5 months’ supply of homes for sale. We can see, based on the guideline above, we are in a buyers’ market and that prices will continue to soften. The other statistic we must watch is the number of months’ of shadow inventory which will be coming to market.

CoreLogic just released their November report (which covers August). They estimate shadow inventory:

… by calculating the number of properties that are seriously delinquent (90 days or more), in foreclosure and real estate owned (REO) by lenders and that are not currently listed on multiple listing services (MLSs). Shadow inventory is typically not included in the official metrics of unsold inventory.

The report showed that shadow inventory jumped more than 10% in the last year, pushing total unsold inventory to 2.1 million houses.

That represents another 8 months of supply.

The Wall Street Journal reported that some analysts have said CoreLogic estimates look rather low.

Laurie Goodman, senior managing director at Amherst Securities Group, has warned that as many as seven million homes could end up in banks hands unless more aggressive modification regimes are put in place.

Barclays estimates that another 3.76 million homes are either in the foreclosure process or are at least 90 days delinquent but not yet in foreclosure.

Bottom Line

Most industry experts are projecting just that – an additional fall in prices of between 5-20%. Mark Fleming, chief economist for CoreLogic commented:

“The weak demand for housing is significantly increasing the risk of further price declines in the housing market. This is being exacerbated by a significant and growing shadow inventory that is likely to persist for some time due to the highly extended time-to-liquidation that servicers are currently experiencing.”

If you are thinking of selling, meet with me immediately. In most parts of the country, selling sooner may be better than later.

Now accepting clients for 2011 !!!!!!  503/320.5141

This is a question anyone thinking about selling must ask. Should they sell now or should they wait for the spring? Most years that would be an interesting question. There is a belief that many buyers come out in the spring and, with that increase in demand for housing, prices may appreciate. This year is unlike any year in recent memory. Most experts believe there will be continuing depreciation of home values throughout the next 18 months.

As we posted on recently, there may be a window of opportunity throughout the rest of 2010 as the banks try to straighten out the paperwork on thousands of foreclosures. Once that paperwork is corrected, the flow of distressed properties coming to the market at discounted prices will begin again.

This was mentioned in the latest Home Price Expectation Survey. Robert Shiller, MacroMarkets co-founder and chief economist said this:

 “Over the past month, the average projection for 2010 nationwide home price performance improved slightly among our experts, but for each year thereafter it deteriorated.  One plausible explanation for this month’s more negative overall sentiment is recent news concerning foreclosure processing questions and the related possibility of extending the supply pipeline.”

Other experts are also reporting that prices will soften next year

 In October’s RPX Monthly Housing Market Report, CEO Michael Feder commented:

“We are at a flex point in housing valuation. With record supply, already paltry demand and systemic threats to a possible correction, we remain terribly concerned about forward home prices.”

The very next day, in a special release, Clear Capital reported a “sudden and dramatic” drop in U.S. home prices:

Most recent data shows a two-month 5.9% price decline representing a magnitude and speed of decline not seen since March 2009; similar declines for September and October expected to appear in other industry indices in coming months.

Bottom Line

If you plan to sell within the next year, you shouldn’t wait for the spring market. Price the home at a compelling price to make sure it sells in the next sixty days.