- The Washington Times - Thursday, November 4, 2010

If you want to understand what is happening in the Washington-area housing market, the most important figures to study are inventory and sales.

Supply and demand are another way to describe them. Either way, the relationship between these two statistics indicates how quickly homes sell, and for how much.

When there aren’t many homes on the market but demand is strong, a buyer has to compete with others to buy the house he wants. That was the situation in 2003 through 2005. You can see in the adjacent charts how high sales were and how low inventory was in 2005.

But the competition among buyers was fueled, in part, by irresponsible lending and borrowing. We had artificial demand, with people buying homes they couldn’t afford and investors seeking to profit from the rising market.

This artificial demand drove up home prices because the inventory was smaller than the demand for homes. It was common for homes to sell in a matter of weeks for much more than the asking price.

By the fall of 2005, homebuyers began to balk at the record-high home prices. Homeowners and investors sensed the lack of enthusiasm among buyers, so they put thousands of properties up for sale.

Inventory surged and continued to grow from 2006 through 2007 and 2008. (Figures from 2006 do not appear in the charts because of space constraints.)

While inventory rose, sales dropped. That combination of high supply and low demand caused area home prices to fall.

Things began to improve in 2008. Even though prices fell significantly that year, you can see 2008 was the year sales began to rise again. Inventory fell in some jurisdictions, as well, which helped set the stage for a better 2009.

By September 2009, inventory and sales in some Northern Virginia counties had returned to 2005 levels. Things have slipped since then, however. This September, we faced declining sales but an inventory that was beginning to creep upward once again.

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