How Housing Inventory Affects Your Home Price

Have you ever wondered why some homes stay in the market for years while others sell in just a flick of a hand?  While there can be a gazillion subjective reasons for houses not to sell fast, there’s no denying that price also matters. 

Setting a price for a home is not done by drawing lots. Experts go through the training to develop an excellent comparative market analysis for your pricing strategy.  And if you are curious about what factors they consider, in this article, we talk about one of the most important — housing inventory.   

The Law of Supply and Demand

But first, let’s do a little refresher on what we’ve learned in middle school.  If there are plenty of buyers in the market, prices can increase too, even if supply is low.  In residential real estate, if there are only a few homes sold in a particular area but plenty of interested buyers, home prices are expected to go up — especially when there’s a bidding war.  Competition is healthy, they say, and literally, this is true for sellers.

Months of Inventory Equation

If you are a numbers person, we can demonstrate the supply and demand scenario with the Months of Inventory (MOI) Equation.

Home Sold For the Month  ÷  No. of Unsold Homes By the End of that Month = MOI

This translates to “Demand  ÷  Supply = MOI”. With MOI, you get a picture of how fast homes are selling.  The lower the MOI, the slower the pace. A lower MOI means that there are plenty of homes for sale but very few buyers. On the other hand, a higher MOI implies that many buyers are looking for a home, but very few homes are available for sale.

Likewise, the MOI also dictates and tells us whether the situation is a Seller’s Market or a Buyer’s Market. Higher MOIs are associated with a Seller’s Market because it means that there is a lot of fish to catch for sellers. On the other hand, lower MOIs are associated with a Buyer’s Market because it means that there are a lot of houses competing to get the attention of one buyer.

On a sidenote, when you look at inventory, be sure to look at “total inventory”. This is because an increasing “new listings inventory”  doesn’t always equate to an increase in the total inventory also. 

average yearly change in new listings versus total listings
Source: Keeping Current Matters

Balanced Market

There are instances, though, that the market is neither a Seller’s Market nor a Buyer’s Market.  This happens when the MOI is equal to 1, or there is an equal number of buyers and homes for sale. This means that neither the seller nor the buyer has the most bargaining power. Technically, a balanced market is declared if this situation goes on for six months. But this rarely happens because this typically occurs during the transition between a Seller’s Market and Buyer’s Market — like what was projected in Atlanta during 2018 – 2019.

During a balanced market, prices come to a standstill too. A seller cannot demand a higher price because there aren’t any other takers. Likewise, the buyer cannot demand to reduce the price because there aren’t any other houses to look at or buy — and the seller knows this. 

Factors Driving Home Prices

So from all of these, an important question comes out — are market price changes purely objective and market-driven? Or do emotions also come into play? Well, it is both. Changes in the market are often a result of emotional factors and logical perceptions at the individual level. 

For example, on the buyer’s cognitive side, the decision to proceed with a purchase can depend on the level of pain and stress, the outlook towards a joyful future in the new home, the fear of making a mistake, and more.  This is also true on the seller’s side. The decision to sell a house can depend on how much the seller wants to move on from the pain associated with the house, the outlook towards a better community, the fear of depleted finances, and more.  And then there’s the cognitive side of developers  investors, and other types of sellers.

But like a lot of decision-making tactics, listening to your emotions isn’t always the smartest way, especially when it comes to setting a price for your home.  This is because your buyer will unlikely consider those emotional reasons as well. To put it bluntly, buyers won’t always purchase a house just because they were told that the seller is “too sad and in dire emotional need to get rid of the house”.

Instead, apart from the number of homes for sale and active buyers, you’d also want to go into the following factors:

  • Historical prices in the neighborhood
  • Future developments in the area and surrounding areas
  • Appraised value
  • The total cost of your most recent renovations
  • Prices of recently sold homes in your neighborhood

The bottom line here is, even if it’s a seller’s market, it wouldn’t be wise to increase your price right away. Yes, you have the power to increase the price when there aren’t many homes in the market, but make sure that it’s not way above the price of your local comps. If you overprice, you’d be surprised when your house becomes the 1 in every 1000 homes that don’t sell during a seller’s market — metaphorically speaking.

If you need help navigating how to set a reasonable price for your home and sell your house fast, reach out to us at HomeSoldGA. We’ve been in the industry for years, and we know the local market well. You can contact us at 770-668-4888.

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