Wine Country And Horses

One of the most interesting measures of the tension between buyers and sellers in a real estate market is the “Months Supply of Inventory” figure. What this number tells us is the number of months it would take to sell the existing number of homes for sale at the present rate of closed sales.

Buyers Market or Sellers Market?

Generally six months of inventory is considered to be a market balanced between buyers and sellers. Anything less, and sellers are advantaged in negotiations. Anything more, and the trend favors buyers. Two years ago in Sonoma county, there were 6.2 months of entry level inventory for sale.

When the first wave of foreclosed properties began hitting our market in force in 2007, the inventory piled up to a high point that so few properties were selling, as many more were coming on the market. Consequently, MSI (Months Supply of Inventory) ballooned to a 14.8 months supply, a strongly favored buyers market.

Early in 2008, banks began slashing prices and buyers have been increasingly active ever since. (See my posts under market updates beginning in March to track this trend.) The lower priced properties, driven by foreclosures, have steadily been absorbed by first time buyers and investors.

They have been gobbling up REO’s so quickly that now there are only 2.7 months of inventory available at the current rate of new listings and sales, a strongly favored sellers market.

If you are a buyer interested in purchasing an REO home, it is important for buyers to be prepared for the market realities especially for the most solid homes in the best locations.

1. You must have a STRONG pre-approval. In many cases first time buyers will be competing with all cash investors for the same properties.
2. You may need to make multiple offers on a stream of properties before you land the right one.
3. It ALL DEPENDS. Make sure you have a committed working relationship with a realtor who is knowledgeable about the changing market, and who knows how to present and negotiate your offer(s) in the best light.

Just as sellers have learned (in some cases!) to be realistic, it is important for buyers to do the same. Happy hunting!

At first glance the overall supply and demand trends for Sonoma County real estate from October 2006 through October 2008 show gentle trend lines that belie the turbulence of our market. The number of units for sale (all residential types and all price ranges) is down modestly (3.9%) from 3284 units then to 3155 units now. The peak was 3608 units for sale in August 2007 with some seasonal trending over the 25 months. The number of units sold has increased by a robust 33% however, to 508 units from 381 units in October 2007.

Days on market for properties in contract has declined from 93 days (peak 112 in January 2007) and the number of properties under contract has grown significantly from 372 to 553. The number of pending Sonoma County home sales is the highest in 4 years. Last year at this time, pending sales were hovering between 166 and 286 units per month! Now they are running 450 to 550. The reason for the change? Banks got aggressive and drastically lowered the list prices of bank-owned (REO) properties creating lots of competitive, interested buyers.

The true story behind any particular home investment is driven by intensely local conditions rather than broad average trends: single family home, country property, vineyard property, fixer or condo. It is absolutely a function of price point with the bulk of the activity under $500,000.

The following graph shows the same trend lines as above(active inventory versus sold listings) for all residential Sonoma County sales under $500,000.  Since the median home price was nearly $600,000 at the market peak in 2005-2006, very little was available under $500K. Since then, it has declined county wide on average jut over 30%–there’s that word again, on average.    While the overall number homes for sale has declined slightly since October 2006, under $500,000. it has nearly doubled.  The number of units sold in this price range has increased nearly 200% in the last 25 months.  Bottom line is the banks figured out pretty quickly how to move REO inventory and both investors and first time buyers are competing for the best of these homes.  Result–inventory is declining faster than it is coming on the market and overall sales velocity has increased, all fueled by the REO bargains.