Friday, December 1, 2006

Days Inventory

Days Inventory. Nothing is more important in my analysis of a neighborhood, and nothing tells me more about the direction of current trending, than days inventory. I look at days inventory when preparing for a listing appointment, when doing research for buyers, when comparing one neighborhood to another (or one floorplan to another), and when analyzing the state of the market in general. So I guess at some point I should explain what Days Inventory actually means...

It's really a very simple measurement of how many houses are currently for sale and how fast they're selling. The calculation is: (# of houses for sale) divided by (# of houses that sell each month) * 30 (which is the number of days in a month). For example, if there are 12 homes currently for sale in your neighborhood, and 2 homes sell every month, then there are 6 months worth of inventory, or 180 Days Inventory. If 3 homes sell every month, then there are only 4 months worth of inventory, or 120 Days Inventory.

This number is very powerful. It can tell me whether the market favors buyers or sellers. It can tell me the net effect of all the sales, expireds, and new listings from one month to the next. It can tell me the trend of the market. It can tell me if one neighborhood is moving more quickly than another.

I've even had one neighborhood where the 4 bedroom homes sold very quickly and the 3 bedroom homes sold very slowly - the total for the neighborhood looked about average, but further anaylsis showed a 45 days inventory for 4 bedrooms and a 300 days inventory for 3 bedrooms. This told me to price my 4 bedroom listings high, and to be very aggressive in pricing my 3 bedroom listings lower.

The general rule of thumb is that a 6 month inventory is a neutral market; more inventory favors buyers and less inventory favors sellers. I think other factors such as the trending of the inventory and the direction of the trending can affect who is favored, but 6 months inventory is a decent enough rule of thumb. Buyers can get better deals if they search for homes in neighborhoods with higher days inventory. Sellers can negotiate more aggressively if their neighborhood has a lower days inventory.

Once you know the days inventory numbers (and the trend), you should be able to make a better plan.