Real Estate: Plenty of Inventory?

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I'm rolling out my third edition of Broward’s Real Estate Yearbook, providing a detailed view of pricing, sales and inventory trends in 35 distinct East Broward neighborhoods (with new expanded coverage of Lake Worth in Palm Beach County).

Last time, I assessed pricing trends in the three neighborhoods of the Island City. In this issue I will have a few things to say about the inventory levels of single-family homes here.

Realtors frequently complain about “low inventory levels.” Sometimes this is warranted; sometimes not. Of course, the principal measure of success among some Realtors is getting new listings, the more the better. But if there are too many homes on the market, buyers may get suspicious about neighborhood desirability and pricing.

In theory, an inventory calculation (measured in the number of months needed to sell the homes on the market at the current rate of sales) should be trivial. Just take the number of homes for sale and divide it by the sales per month. 

This has made me uncomfortable for a couple different reasons at least. First of all, there are ways of manipulating this statistic (to a degree) to produce a misleading result. But by hearkening back to my previous career in Actuary-Land, I have developed a methodology to correct for that. (For purposes of this column, you don’t need to know the details, but I may do a technical note on it for my website, someday, if anyone is interested. Next year I will serve on the Research Advisory Committee for Florida Association of Realtors, and perhaps I can work on that with them.)

The second reason is easier to explain. Here in South Florida, our real estate sales vary seasonally, sometimes dramatically so. Further, with the variability in sales rates known among owners (and, one would expect, Realtors), the level of inventory at any given time would be what is known in statistics and economics as a leading indicator of coming sales activity, and not a coincident indicator.

To see what effects these matters would have on the “months of inventory” calculation for the Island City as a whole, I looked at average sales over three, six and 12-month periods, compared with average inventory levels for periods ending three months prior to the date in question. The results are shown in the graph.

Two observations in closing. First, overall inventory levels in WilMa have been acceptable, even ample, over the last several years. Second, the analysis raises a question of what, exactly, is the optimal level of inventory. Looking across the 41 neighborhoods in the yearbook, inventory levels by neighborhood increase (from a base level) at a rate of roughly one month for every $100,000 of price. This suggests that the Realtor “rule of thumb” that inventory of less than six months indicates a “seller’s market” is not universally applicable. And my frequent readers know how I feel about rules of thumb.

James Oaksun, Florida's Real Estate Geek(SM), is Broker-Owner of New Realty Concepts in Oakland Park. In addition to having degrees from Dartmouth and Cornell, he is a Graduate of the Realtor Institute (GRI).

 


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