A Look at Bay Area 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 for single-family sales, based on the lates data I have available:

November 2008
Active Listings: up 0.9% YOY
Closed Sales: up 18.7% YOY

Our first chart displays the raw supply and demand data back through early 2007:

2008 marked a new high point for Bay Area homes on the market, but listings plateaued early this year and have come down from their highs to match up pretty closely with 2007 in November. Meanwhile, the number of homes selling in the Bay Area has been slowly but surely rising throughout 2008.

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.

Inventory has basically flattened out on a year-over-year basis, while closed sales have been on the rise YOY since July.

The inventory pattern here in the Bay Area indicates a softening market, but not a dramatically crashing one. Likewise for the number of closed sales. Of course, we know that prices are falling, so it seems likely that the explanation for the relatively strong pattern of supply and demand would indicate that the falling prices are luring in buyers.