What is considered to be a lot of inventory and does it ever go down? I think our area has a lot of homes on the market with new ones propping up all the time.
More homes for sale than buyers? It goes down when people start buying.
Here in ND we have the opposite no house, way too many people waiting. They are building more, but takes time due to certain areas don't want to overbuild, as they did a few years ago, lack of contractors, and lack of materials. Most of the material sorry to say come from across seas and is not quality stuff. But we sure have allot of oil.
From what I've read, a housing inventory level of 5-6 months is considered healthy--not too hot, not too cold.
Sellers need to cut their prices if there is too much inventory. The sooner the sellers cut their prices, the faster the market will clear of excess inventory.
"A lot" is always in the eye of the beholder.
They usually report inventory in "months." eg 6 months of inventory means that at the current rate people are buying houses, it will take 6 months for all the current houses for sale to be sold.
It does not mean that any particular house will take 6 months to sell. Houses come on and off the market all the time. Sales can pick up or slow down. The inventory figure is just an guestimate of how long the average home will take to sell at an average price.
"...the current rate people are buying houses..."
How is that rate figured? How far back in time do they account for?
It is a way to compare different markets, or the same market at two different points in time.
The rate is typically figured for one month. The number is based upon current inventory versus sales for the past month. The number can be used to compare markets, price ranges in a particular market, or the same market at different points in time. For example, my market has a 3 months supply of houses under 100,000, but a 36 month supply of houses over $500,000. The overall market sits at about 6 months. That number isn't particularly helpful to someone trying to sell a $600,000 house or the buyer looking for a deal on $85,000.
It's too late to edit my post, and I just noticed bill's response. I disagree with, " The inventory figure is just an guestimate of how long the average home will take to sell at an average price." The number is not related to days on market. The number indicates how long it would take ALL inventory to sell IF no new homes came onto the market based upon recent sales figures. It's a figure used to describe the current supply and demand or the absorption rate.
I posted a similar question below. In my town there is a guy that blogs about real estate analysis. He does a ratio called years supply of inventory where he divides the current number of homes for sale by the number of home sales in the previous month. In my area it is about 2.8 years and slowly getting better each month. He seems to think that 6 months supply is a sign of a healthy market but I'm not sure how he came up with that figure.
rrah - I gave the same "real" formula for how inventory is measured. In practice though, the number is used as a rough estimate of how long it takes for houses to sell in a given area. If the inventory is only 2 weeks, houses are barely getting on the market before they are sold. If the inventory is 2 years, houses are sitting around because there aren't enough buyers for the number of properties on the market.
Days on the market is not the same as absorption rates.
DOM is almost always shorter than the absorption rate. Like RRAH said, houses come on and off the market all the time. Absorption rate is a much better tool to use when trying to analyze how an entire market inventory is changing or not changing as a whole. DOM is better when comparing properties. But remember, that the data in the MLS is terrible to use for determining DOM, because agents pull out listings for one minute and put them right back in, only to set the DOM clock back to zero. Also, especially in this market, a lot of homes have been listed, expired, priced reduced, and relisted, sometimes multiple times. But the MLS only takes into account how long it was on the market the very last time it was listed.
Anyhow, absorption rate is a much cleaner and transparent way of telling which direction a market is going.
You can argue about which is a better indicator of what, but in practice, these are just rough estimates of what to expect when selling a home. If you are a homeowner, and not an economist, that is what you are looking for. Nobody can tell you exactly how long a sale is going to take, but months of inventory will give you a ballpark figure and some general guidance about how to price a property. If you have 1 year of inventory out there and want to sell your home in 2 months, you are going to have to price pretty aggressively to sell. If you have 1 month of inventory and 2 months to sell, you aren't going to have to chase buyers with price nearly as much.
As for the second half of the OP's question, yes, inventory changes over time. If more people decide to start buying tomorrow, the inventory will generally start to go down. If we have more market scares, people may put off home purchases and the inventory may go up. It really is just a snapshot in time. If you compare inventory in your area now to 2005, you assuredly will see a huge change.