George Mason University’s Lisa A. Sturtevant writes an occasional column analyzing the region’s housing data.
Inventories of homes for sale in the Washington region are at historically low levels, and the current real estate market gives an advantage to current sellers as buyers face limited choices.
But exactly how tight is the current inventory? And how does the supply vary across neighborhoods and housing types?
The steady decline of inventories of existing homes exemplifies the recent recovery of the Washington area’s housing market. RealEstate Business Intelligence and MRIS report that active and new listings in the metro area are the lowest on record. At the same time, the pace of sales activity has continued to increase in early 2013, though at a somewhat slower rate than in the last half of 2012.
One measure of the relative leanness of the housing supply is months of inventory, measured by dividing the existing inventory of homes for sale by a monthly average of sales. By this metric, the inventory in many Washington area jurisdictions is downright emaciated. In the District, for example, there was a total of 1,010 homes listed for sale at the end of 2012. On average, there were about 555 sales per month in the city. So, in the District there is 1.8 months of inventory — that is, it would take just 1.8 months to completely draw down the current supply.
(This measure does not take into account the fact that the homes in the inventory at any given time have different characteristics — they might be more expensive, in less desirable locations, etc.— than the sales. But it’s not a bad way to gauge the current position of the market.)
In the region’s core jurisdictions, the months of inventory ranged from a low of 1.2 months in Arlington County to 2.7 months in Prince George’s County.
The National Association of Realtors and others often equate six months of inventory with a “balanced market.” More than six months of inventory indicates a buyers’ market, while less than six months of inventory gives sellers the advantage. While this might be a reasonable indicator in many markets, the Washington area appears to be quite different, with months of inventory generally below six even at the end of 2006, when the market was on its descent. But by the region’s historical standards, the current market does appear to be significantly tilted to sellers.
Inventory measures drop even further when you drill down by neighborhood and product type, particularly townhouses. For example, there is just a half month’s supply of townhouse inventory available in Arlington County (calculated using the same method above, specifically for townhouses.) In Fairfax County, the existing inventory of townhouses for sale could be depleted in 0.7 months.
Inventories have been low because many would-be sellers have remained on the sidelines. Some homeowners have been waiting to be sure that prices are going to continue to rise. Homeowners underwater on their mortgage have been waiting for home values to increase. Uncertainty about economic conditions — particularly how the fiscal debate in Washington might affect local jobs — has also worried many would-be sellers over the last year.
When the typical spring market kicks into gear, sellers might be compelled to enter the market to take advantage of the pent-up demand. New construction, which has recently started to pick up, will also begin to add to inventories.
The lingering uncertainty over federal spending cuts suggests that any additions to the region’s inventory will be modest, at least until after March.
Lisa A. Sturtevant is an associate research professor in George Mason University’s School of Public Policy and deputy director of GMU’s Center for Regional Analysis.