5 Months Inventory Does Not A Balanced Market Make, Young Jedi!

Data, Visuals and the Underlying Data

One of my peers, Ryan Lundquist made a post on linkedIn yesterday. Although, based out of Sacramento you should check out his blog. He has spent years providing insightful market intelligence with lots of great graphics, all in a lighthearted, easy-to-digest format and, I have to admit, a catalyst for me to decide to step outside my comfort zone, start this blog over a year ago and sharing some of my thoughts. Check out https://sacramentoappraisalblog.com/

The post was about the myth “5 month inventory is a balanced market”. To be fair, most stats I see quoted are between 3 to 6 months, being a balanced market. 4 to 6 is also frequently referenced. Here is a link to a reference by MoneySense-RateHub that also describes how months’ inventory is calculated.

The issue is that this is not always, or probably as often as not, an accurate reflection of many markets, as Ryan points out. I decided to contribute to the discussion because it also leads into another discussion that is dear to my heart. There is a lot of “convincing technology” floating around out there, and now more than ever, those making insights or providing insights based on market data or valuation products should remain vigilant in ensuring they understand the reliability of the reporting.

How does this all relate? So, I provided a graphic showing a couple example “markets”. I chose markets that are not “neighbourhoods” in the typical sense because there is a lot of rhetoric at the moment about appraisers using neighbourhoods to define markets, potentially crossing the line into racial or ethnic discrimination. Various influences create market supply, demand and value, none of which is based on racial bias as far as the appraisal analysis is concerned. While there may be varied demographics in all areas, using ethnicity to develop neighbourhood search criteria was eliminated years ago. My point is that even within a single neighbourhood or spanning several neighbourhoods, there can and will be unique markets that are not defined in the typical sense of physically mapped boundaries. This is where domain expertise comes into play and why certain valuation methods fail to provide consistently credible insights.

So, back to the data and inventory versus price stability or balanced, increasing or decreasing trends. Simply put, buyers or sellers markets. In addition to Ryan’s examples of overall differences in large market areas, within the graphics I provided two different “markets”, one of them is a market of lakeview properties, and the other is lakeshore properties. Each of these markets includes the same “neighbourhoods” as defined by the local MLS effectively ignoring neighbourhoods and creating singular markets for each appeal type. There are a number of different ways you can achieve this but I have developed a tool tailored specifically for this type of more in-depth analysis.

You can find out more here in a youtube video demo. The demo is a different market but a similar process would be followed. The link jumps to the part of the video where I start discussing the neighbourhood but you can always watch the whole video for a bit more background.

Back to the first chart below which is “lakeview” properties. You can see the general trends, but they are a little unclear. This was close to a couple thousand sales over the 10 years. These are stats and graphs pulled directly from my MLS based on my search criteria. There are some significant outliers in the data but in particular, inventory in Dec 2023 which is questionable and maybe worthy of a little more research but that is a bit more effort and not critical for this discussion.

The next chart is the “Lakeshore” properties. There are only a few hundred sales over the past decade spanning several neighbourhoods. Using only one neighbourhood there would be insufficient data to even create a legible line graph using multiple provides almost enough data to gain some insight, but it is still almost impossible to define a trend line with the human eye.

So, I thought, “Hey, let’s clean this up so the readers can get a better idea of what’s going on” by providing the following chart where prices are the thicker lines, the red tones are “lakeshore” and the brown tones are “Lakeview”. Read on because I am not saying this is where the discussion stops; really, it’s just getting started, but this is where many will start and stop. A nice, clean chart looks good, why bother with the messy data?

Sure, we get a general sense of it, but there are some confounding trends. It’s real estate, it’s not perfect and it’s rarely simple.

Now, keep in mind for each month, the inventory is a single snapshot of inventory divided by sales = months inventory, and price is the median price for that month. I used median as it is generally considered more consistent and has less variance than average values, although that is not always true. A benchmark may be better, but that would be nearly, or actually, impossible to do with only the lakeshore market data. The point is that for price, the actual data points would be nearly impossible to visualize a trend. Here is basically the same lakeshore data, for prices only, on a scatterplot. This is sold price over sold date for the same period. So, how reliable is this data or the insights gained from it? Besides revealing the issue Ryan pointed to, in neither case is the standard 3 to 6 months inventory even in the ballpark, I think the best conclusion that can be drawn is that the months inventory is more of a macroeconomic factor.

Going into a negotiation with a particular seller or buyer thinking that you are armed with a silver bullet or a holy grail may not be helpful. Bringing your dartboard may be more effective.

or, better yet, try a little more strategy.

Thanks again to those peers and other industry experts who continue to share their insights, creating a more open and knowledgeable industry overall.

A particular shout-out to my American Cousins who put up with the Canuck!

and as always I want to put a plug in for George Dell and our Community of Asset Analysts. If you are in the valuation space or interested, whether you are an appraiser or not, whatever space you are in, you may benefit from valuation insights oriented around real estate, I encourage you to check out this movement.

or HERE to sign up for courses https://www.valuemetrics.info/