- - Thursday, November 3, 2011

When you are looking at any product that is bought and sold, the relationship between supply and demand will tell you a lot about pricing.

When there are plenty of buyers for something but limited supply, prices typically rise. When the market is flooded with products that no one is buying, prices fall.

Late in 2005, the Washington-area housing market was hit with a flood of homes for sale (supply). But buyers lost interest because prices were high, so sales activity (demand) dropped off.

Homeowners and investors who wanted to cash out before the market turned continued to put thousands of properties up for sale. All of that additional supply and the wave of foreclosures that soon followed were the reasons home prices dropped so much.

By 2009, we began to see supply and demand shifting in better directions. As today’s charts show, many jurisdictions saw a drop in supply and a rise in demand in 2009 and 2010.

This year, we generally have seen another modest drop in supply. Even better than that, sales have risen in nearly every jurisdiction. And when we see sales rising faster than inventory, we know the market is improving.

Because it’s improving, we have seen some increases in home prices since the beginning of this year. It’s not much, and often it isn’t enough to erase the price declines from recent years, but because supply and demand both have improved, we can be relatively confident that prices have stabilized and have the potential to rise further in coming years.

A shorthand way of looking at supply and demand is to divide a month’s sales figures by the inventory on the last day of the month, resulting in a percentage that I call sales chances. A figure below 20 percent indicates a buyer’s market. Higher figures mean we’re in a balanced market or a seller’s market.

Sales chances in September were as high as 44 percent in Manassas, 35 percent in Prince William and 25 percent Prince George’s County. Every jurisdiction inside or near the Beltway saw chances of 23 percent or more in September — compared to 6 percent to 16 percent four years ago.

Send email to csicks@gmail.com.



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