Remembering basic economics in real estate

Have you ever watched the TV show Antiques Roadshow on PBS? Once in a while I’ll catch an episode since it’s always interesting to see what people’s stuff is worth. If only I had that type of “junk” lying around my house. While watching the other day with my sons, it was like a basic economics lesson for them. It seems other than the quality of the item, year built and person/company who made it, one of THE most important factors in the item’s value is scarcity. Pure and simply, if there are more of an item, it tends to be worth less, but if the item is scarce in supply, it tends to be more valuable. The same holds true in real estate.

As housing inventory has increased in Sacramento County over the past few months, values have been impacted. This is a basic outworking of the economic principle of supply and demand. As supply has increased, demand has begun to be slightly more satisfied, which has led to the market cooling off a bit (not to mention Summer is fading away).  As you can see in the graph below, prices tend to decline when inventory increases (it tends to take a number of months). Likewise, when inventory shrinks, prices tend to rise.

I know this is basic stuff, but there are a few reasons I bring this up:

1. Caution – Economics at Work: There is something normal about what is happening, yet some people are either saying there will be little to no impact from rising inventory (and interest rates) or not seeming to embrace that it is regular for a market to chill out in August and beyond.
2. Watch the Numbers: Consider how an uptick of 0.50 months of extra housing in Sacramento County has made a noticeable impact over these past months. We’ve seen Days on Market (DOM) increase, values have begun to cool and there have generally been less offers made on properties too. I think we’ve bottomed out when it comes to inventory, so this is an important time in our market.
3. Layers of the Cake: Remember that value is like a multi-layered cake in that there are many aspects that create value in the market. Interest rates, inventory, the economy, cash investors, financing, affordability and so many other “layers” are what go into causing real estate values to rise or fall.
4. Be an Expert for Your Clients: If you are in the real estate community, watch the numbers closely to be able to explain what is happening to your clients. Be careful about flinging positive spin that goes against basic economics and trends that seem to be unfolding locally. Show your clients graphs or learn how to make your own graphs. Do what your competition is not willing to do and know the numbers well enough to be able to spew them off at any given moment (this can only happen if you pay attention very regularly).

In short, let’s not forget Economics 101 as we see inventory increasing in the Sacramento area and many other areas throughout the country. Of course sometimes fundamentals don’t cause as big of a stir as we’d think because there are other factors (or “layers”) to consider, but keep an eye on what inventory does. This is important.

Question: By the way, do you watch Antiques Roadshow? Why or why not?

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