Inventory and Interest Rates - Getting the numbers right

Recently I was at a networking event hosted by my local chamber of commerce. There must have been 30 or 40 people present and surprisingly, only one other was a realtor. He was from another firm, a highly respectable firm that’s quite noticeable here in Whatcom County. I have met him before and he’s a pretty decent human being. But during the 30 second introduction we were each given, he made a couple of remarks that didn’t sit well with me.

While I understand that we are all very busy and may not have time to double check facts and statistics, the numbers that he spouted off were not entirely accurate. They sounded good and made him look intelligent, but they were off.

Here’s what he said, “inventory in Whatcom County is at 3 months.” While this number isn’t exactly incorrect, it is far from accurate. Such a comment is similar to saying that the sun is larger than the moon. It’s true, but not very helpful.

For starters, let’s explain what inventory really is. Essentially, inventory is the number of months it would take for the existing number of homes currently for sale to get completely sold, while assuming that no new homes go on the market. For example, let’s say that there are 30 homes currently for sale and last month 10 were sold. Well, it would take 3 full months before inventory would be exhausted.

The thing about the number of months of inventory is that you also need to specify a location, type of property, price point, etc. If you don’t, then you get an average of all properties out there. Typically, the number that is quoted in the papers, on the radio and television, and by our friends at Chamber of Commerce meetings is restricted only to location. And yes, the inventory in Whatcom County stands at 3.2 months. But this is for all properties, including condos, short sales, bank owned property, waterfront property and with no price restrictions.

You might be thinking, “does it really matter that much?” Well, the answer is absolutely. The number of months of inventory tells a clear story of the strength and direction of the market. For all intents and purposes, it is a buyer’s market when inventory is 6 months or greater and a seller’s market when it is under 4 months. Would it not help to know exactly how strong of a buyer’s or seller’s market it is?

Consider this, for all properties located in Whatcom County the inventory is 3.2 months. That means we are in a pretty strong seller’s market. But, if we exclude short sales and bank owned properties (which can take much longer to sell), condos and waterfront properties, and we limit prices to $200,000-$400,000, the number drops down by 40% to 1.8 months. This is an exceedingly strong seller’s market.

If we exclude waterfront properties, condos, short sales and bank owned but instead have a minimum price point of at least $500,000, inventory skyrockets to 7.3 months. So, if you are thinking about selling a property for over $500,000 you may want to reconsider since that property is in a buyer’s market.

One other comment the realtor made that bothered me had to do with interest rates. In short, he said that it is a good time to buy because interest rates are still low. Yes, while it is helpful to have low interest rates when purchasing property there is also an inherent flaw in that thinking. If you recall from your Econ 101 class you should know that there is an inverse relationship between interest rates and home prices. So when you buy a home at record low interest rates, you are buying at the high of the market. The best time to buy a home is when you have to. People don’t buy houses because interest rates are low. They buy because they are relocating for a job, to accommodate a spouse, to move into a specific school district, to be closer to friends or family (or to be further away), etc. Ask yourself this, why did you buy your last property? Was it because interest rates were low?

Didn’t think so.

I enjoy insightful and interesting numbers as much as the next bloke. But would it hurt too much to do just a little bit of due diligence to make sure they are accurate and make sense? Or better yet, ensure that the numbers do not lead someone to making a terrible mistake?