The Three Kinds of Markets

There are three kinds of real estate markets:

1. Appreciating market
2. Stable market
3. Declining market

An appreciating market is a "Seller's Market" where there is more demand than there is inventory. Values are going up and homes are selling quickly. This market is easily identified when the Average Monthly Supply runs from just a few weeks to less than 5 months.

Next, we have a stable market wherein Supply and Demand are in relative equilibrium. Values are generally flat. It's neither a buyer's nor a seller's market, and the Average Monthly Supply runs between 5 and 7 months.

Last, we have the dreaded declining market wherein supply exceeds demand and where values decline. This is a buyer's market and the Average Monthly Supply exceeds 7 months.

The Laws of Supply and Demand define the kind of markets we have and whether values move up or down. We can also have different kinds of markets and markets within markets. Let me explain. The Metro Denver real estate market is considered a "macro" market; big
and all encompassing. And within this macro market are smaller "micro" markets. Aurora, Southeast Denver, and South Suburban Denver are all micro markets. The condominium market and the market for raw land are also micro markets as they are parts of a larger market.

The real estate market is an excellent and fascinating market to follow. Why? Because our real estate market is generally free of artificial influences, ie: price supports, subsidies, etc. It is remarkably "pure" in that respect.

Our residential real estate market also consists of new construction and resales. Thus, our Supply is mostly driven by Builders whereas Demand is generally driven by job creation or job loss.

So What's the Average Monthly Supply?

Well, it's similar to the average selling time. Here's an explanation. Suppose you had a little neighborhood (a micro market) of 100 homes. Suppose there were 10 homes on the market and every month one home sold and another home came on the market. This market would have an Average Monthly Supply of 10 months. It's simple: one home sells every month and there are 10 homes on the market so this market has a 10 month supply at the current rate of absorption.

This neighborhood has a declining market or a buyer's market based upon its dismal Average Monthly Supply. Values would be falling. It doesn't matter whether sales are up or down over last year. It doesn't matter whether the number of homes for sale is up or down. What matters is the "vitality" or "health" of the market which is best judged by the Average Monthly Supply.

Cycles...

Our real estate markets move in cycles; seasonal and cyclical. Our inventory of properties for sale (supply) swells in the spring and summer and shrinks in the fall and winter. The same thing happens with demand. Buyers flood the market in spring and summer and retreat in the fall and winter. Inventory and demand generally peak in July or August and reach their lowest point in January and February. I call this "seasonality". Our real estate market also moves in longer cycles. These cycle are harder to predict. Some experts say they last 7 years. It appears that these longer real estate cycles are nearly identical to normal "business cycles"; perhaps beginning and ending a bit earlier.

Lastly, whatever goes up will come down and vice versa. Change ... you can count on that!

I hope that this information has been helpful to you.  If you have questions about anything at all, don't hesitate to contact me.