A Look at Los Angeles Supply and Demand

Let’s take a look at the big picture of supply (residential listings on the market at month-end) and demand (closed home sales). Having an idea of what is going on with supply and demand can be an excellent way to measure the general “strength” or “hotness” of a real estate market, and often will provide a hint of the future direction of home price changes.

Here’s a brief market summary, based on the lates data I have available:

November 2008
Active Listings: down 21.8% YOY
Closed Sales: up 84.6% YOY

Our first chart displays the raw supply and demand data back through mid-2007 (as far as I have data available):

Unfortunately the data that I have available on inventory and sales for Los Angeles County only goes back 18 months, so we can’t really get a good picture of what this year looks like compared to the real boom years of 2004 and 2005, but we can see what things look like compared to this time last year.

Here’s a look at the year-over-year (YOY) change in the previous chart. YOY is the best way to interpret the direction of the market, due to the highly cyclical nature of real estate.

Sales levels have been way up since July, probably due to the rather severe price drops we have seen (down 33% from the peak as of September, according to Case-Shiller). With home prices coming back down out of the stratosphere here in SoCal, it would appear that at least some buyers are moving into the market.

Although improved sales volumes and decreasing inventory are two of the primary incredients in increasing prices, they appear to be having little effect right now. I could see this trend (rising sales, falling inventory and prices) continuing for another year or two, but eventually one of the three will have to swap directions. Personally I expect sales to reach a plateau within a year or so, with price declines finally slowing as well.