Near Historic Low Inventory

By MICHAEL EDLEN | Special to the Palisadian-Post

We all know that interest rates have been at near historic lows for more than two years and that this low cost of money environment did succeed in stimulating the economy to a great extent.

The average interest rate for home loans for many decades was 7 to 8%. Home buyers have been able to obtain financing at 3% or lower, which has made it possible to purchase homes that otherwise would have been unaffordable.

Due to this unusually strong buying period, sellers have also benefited by having their home values increase steadily for the last few years. Even during the unsettling COVID period, buyers were lining up to make offers on homes in most price ranges if they were priced reasonably. In fact, the comparison in sales activity for the first quarter of 2021 with the same period of 2020 (just when the COVID period was beginning) shows an increase in sales of more than 125% and average prices up about 10%.

How strong a “seller’s market” is can be measured by comparing the average rate of sales per month with the available inventory of homes for sale in that period. It is generally considered that a market is in balance between buyers and sellers when that level of inventory is about six months.

If the level reaches seven or more months of inventory, it is considered to be a “buyer’s market.” When the inventory level dips below five months, it is a “seller’s market.”

At the end of the first quarter last year, the inventory was up to seven months. This was due to the beginning of the COVID period and a stable inventory of homes available.

At the end of the first quarter this year, the market has shifted dramatically, with only two months’ level of inventory in the Palisades. This reflects a remarkable increase in the number of homes being sold each month, approximately 50% higher than the average over the last 20 years.

The last time we saw fewer than 70 Palisades homes for sale at the end of the first quarter was in 2005. And the last time we experienced such a strong “seller’s market” was in 2004-2005 when the inventory of homes available was about two months.

It may be of interest to give a bit of perspective on these numbers. When the market was strongly biased in favor of buyers in 2009, there was more than a full year of inventory available with 177 homes for sale and only 14 selling each month on average. So far this year we are seeing 30 homes selling each month.

Even though interest rates have recently risen above 3%, there is a large pool of eager buyers who are capable of purchasing homes. This strength could result in continued upward pressure on prices for at least some months more, even if the cost of money increases to 4%.

Inventory is likely to begin increasing as we move further into the spring season, which might alleviate some of the pressure on prices.

Michael Edlen is available for complimentary counseling about any individual’s home or to explore housing alternatives either local or elsewhere. He can be reached at 310-600-7422 or michael@edlenteam.com.