Does inventory set home prices?

Question:

Does a low home sales inventory situation cause home prices to rise?

Answer:

No, inventory is not a reliable indicator of future home pricing.

It’s a common misconception that low inventory translates directly to higher prices.

An example from the grocery store: when there’s a shortage on sought-after produce like oranges, the price of oranges goes up. But what if the shortage was in a produce that no one really wants, like brussels sprouts? Would the shortage on brussels sprouts really make a difference in prices? Not so much.

Homes are like produce in this sense: pricing always comes back to demand. Inventory (supply) is a side issue and only matters to prices if demand is present to begin with.

California’s current multiple listing service (MLS) market looks more like brussels sprouts than oranges. Homebuyers are skeptical of purchasing today due to the suicidal rise in prices during 2013, caused entirely by speculatorover-activity. Add that lack of confidence in the housing market to the collective lack of income due to the slow jobs recovery and you have a low-demand situation.

Today’s low demand is reflected in a slipping home sales volume, expected to drag home prices down throughout 2014.

Sellers will price their homes at yesterday’s prices until they’re forced to face reality and lower them—the sticky pricing phenomenon. It usually takes several months for sellers to adjust their price expectations. However, adjust downward they will, for homebuyers ultimately set the price of homes, not sellers.

Source: http://journal.firsttuesday.us/   Posted by Carrie B. Reyes