A significant amount of attention has been given by the media due to the recent increase in existing home sales. Not surprisingly, the media tends to sensationalize data. In most cases, valuable information is missing that would provide a clearer picture of what trends are occurring in the real estate market.

For example, the media may report that sales are up significantly since last year. This leads the reader to assume that a real estate recovery is under way. This “perception” may not be accurate. The truth may be that the activity in the prior year was dismal, and the 10% year-over-year increase may still be well below the average number of sales that occur in a healthy market. The key to determining the health of the market in this case, requires the audience to compare the number of sales this year, to the typical number of sales the area would see in a healthy market.

A conclusion regarding the overall health of the real estate market cannot be determined by looking exclusively at the number of homes selling. For this discussion, we’ll call this the “Demand” for homes within a given market. The demand is a critical indicator, but the real situation won’t be evident without also looking at the “Supply” of homes for sale. The supply in our discussion is the same as the inventory of homes available for sale, or the # of active listings.

    By evaluating both the Supply and Demand indicators, the picture becomes much clearer. In our example above, the demand had increased 10%. If the Supply had increased 20%, we still have very serious issues because the number of homes for sale is increasing faster than the number of properties selling, thus increasing the glut of inventory for sale. The conclusion, we can’t determine whether a recovery is under way unless we evaluate both indicators.

There is another indicator that is more reliable than either Supply or Demand. It is the months supply of homes for sale. This indicator can be called the “Consumption” rate of homes for sale. It is more reliable because it is calculated by looking at both Supply and Demand. For example, sellers will soon be reading about how the supply of homes for sale, is dropping, perhaps significantly. They will be led to believe that the real estate market is once again healthy. If a seller believes the market is improving, they may want to hold out for a better price. This is a questionable strategy if the market is getting worse.

Every seller must know what’s happening to make a good decision about selling.

Because we’ve already determined that the Consumption, or months supply of homes for sale is a much better indicator, all sellers are urged to become familiar with the Consumption indicator. Although, one positive sign of an improving real estate market will occur when the months supply of homes for sale starts to drop. An informed decision, or final evaluation in preparation for a move, cannot be determined until:

“We compare the months supply of homes for sale to what is considered normal in a healthy market.”

Remember, when there is a 6 month supply of homes available for sale, the real estate market is considered to be in balance, and favors neither buyers, nor sellers.

The key point to remember about Supply, Demand, and Consumption, is that you can’t determine how healthy the market is, until you’ve compared the current months supply of homes for sale to the normal 6 month supply of homes for sale found in a healthy market. It’s even possible for sales to be increasing and inventory to be dropping, yet still have price depreciation. Sellers should not expect prices to recover until the month’s supply of homes within an area returns to the 6 month supply found when in a healthy market.