How can you tell if it’s really a buyer’s market or seller’s market? One important data point is the months or inventory, also known as the absorption rate.
The months of inventory (MOI) tells us how long it would take for the current inventory to be absorbed if sales continue at the same rate and no new inventory were to be added.
What is the months of inventory?
The best explanation given to me for the absorption rate uses the analogy of a bathtub draining. If the tub has water in it, and no new water is added, and the drain is opened (and drains at a constant rate), how long will it take for the water to all be eliminated?
So too with Silicon Valley homes for sale. How long would it take for the current supply to be bought up if no new listings came on the market? That’s the question. It can be days of inventory, weeks of inventory, or months of inventory – or any other chunk of time you want to use. My monthly Silicon Valley RE Report uses days of inventory, referenced via DOI in the chart below, where you can see that the average days of inventory for the county is 61, or about 2 months. A quick scan down that column will provide a sense of the market for each city and town.
The faster the absorption rate, the easier it is for sellers to sell and the harder it is for buyers to buy. In the U.S., about 5- 6 months of inventory is a balanced market. Here in Silicon Valley, balanced is probably closer to 4 months of inventory.
Readers of this blog know that I really like the multi year view of data, and I think with the months of inventory that’s also really helpful. Here’s the rate for Santa Clara County, single family homes, from January 2014 to May 2020 (needs a full month to be accurate).
For the month of may, the months of inventory was 2.2, which is significantly more than most of the last six years, and double the height of the market in 2017 and 2018. Translation: buyers, this is the best it’s been for you to buy in years. Yes there may be multiple offers – but if so, it is very likely to be much calmer than this time last year or at any other time for this same season in years.
San Jose’s months of inventory
San Jose makes up about half the population of the county and typically homes in San Jose sell for a little less than the county as a whole. I like to include this because San Jose is a huge part of the county, but also because it informs us how the more affordable, generally non-luxury homes are selling in broad strokes.
In this case, San Jose homes are getting absorbed about 10% faster than the county as a whole. That seems fairly consistent if you spot check various years/months, though not for every single month.
Mountain View months of inventory
This corner of Silicon Valley is usually a very hot commodity. Houses there are more expensive, though, and it’s interesting to see that the months of inventory is uncharacteristically high there right now. It’s possible that more luxury tier homes are on the market and skewing the data. If you are wanting to buy or sell a house there, this would bear more investigation.
Milpitas months of inventory
Milpitas has a lot to offer and is more affordable overall, so it’s useful to know how the absorption rate is there. May jumped way up compared to other months this year, much more than county or San Jose. Any one month does not make a trend, but this is something to watch.
Almaden months of inventory
Next, a more high end area of San Jose, Almaden Valley. Here the numbers are a bit lower, but again, higher than both the city of San Jose and the county as a whole. This suggests that the more expensive homes are a bit harder to sell right now.
Los Gatos months of inventory 95030 & 95032
The chart below shows the absorption rate for the town of Los Gatos with the zip codes 95030 and 95032 (the Los Gatos Mountains have a Los Gatos mailing address but most of that area is not incorporated and has the zip code of 95033). This area touches Almaden, is actually more expensive, but the absorption rate is less, which seems to fly in the face of my theory that the more expensive homes are the slower to sell. It’s a small area, so fluctuations are not uncommon. Interesting, too, that the pattern each month of 2020 does not follow the county’s very steady increase each month.
Although the underlying “why” some areas have a lower absorption rate than others, it may remain a mystery for right now, it’s still helpful for home buyers who are looking for relief. Been beat out 5 or 10 times? Your odds will be improved in the areas listed in the first chart with the areas with the longer days of inventory.
This same data can be viewed by pricing tier, school district, or almost any other factor, by the way.