Why your home's price isn't really crashing

It seems every headline on the housing market says "home prices fall 40%."  If you read enough of these headlines, it's easy to believe home prices are spiraling toward zero with no end in sight, but it's nowhere near that bad.  There are two important data facts the media don't clarify often enough in their news articles to help readers get a better picture of the real estate market.  Knowing these facts can give you better insight and greater confidence in one of your most important assets.

Fact #1: Inventory is shrinking because sales volume is skyrocketing

In California, sales of single family homes is up 64 percent over last year, driving supply down to 5 months of inventory in March, from its peak of 16.6 months in January 2008. As you can see from the chart below, inventory in California has been steadily declining since January 2008.  In fact, you can see it's much lower today than it was in the booming mid-90's. 

Today's five months of inventory is very healthy.  The only way for the market to heal is to get back to an equilibrium in supply and demand. Higher sales volume is an indicator that the free market is doing its magic and it's only a matter of time before we reach equilibrium.  Just how long it will take to reach equilibrium is difficult to estimate, but we are definitely on our way there.

Fact #2: They're not measuring the value of yourhome

The second fact has to do with understanding what the statistics are actually measuring.  Each month, the California Association of Realtors (and the National Association) look at all the houses sold in a market and calculate the average.   Since this is a terrible time to sell a home, only those who are forced to sell are doing so.  Banks unloading foreclosed homes, people trying to avoid foreclosure or bankruptcy and other distressed sellers are flooding the market and driving prices down, especially in lower priced markets where low-end buyers were stretching to qualify for mortgages in the first place.  It's a classic buyer's market. 

But they're only averaging the prices of the homes that do sell; they are NOT measuring the value of a home and comparing it to the same home one year ago. For example, here in Pleasanton home prices are down about 20% from the peak, yet prices in Alameda county are reported to have dropped 41%. To take an extreme example to clarify my point, if all homes that sold in March 2008 were in Pleasanton and in March 2009 the only homes that sold in Alameda county were in west Oakland (where the average home price is much lower than Pleasanton), the statistics for Alameda county would report a huge drop in prices, even if the overall market was flat or up.

So if you wonder why your home price hasn't dropped as much as the reports show, it's not just that you're lucky, it's that they're calculating a number that doesn't reflect what your home is actually worth.  By knowing these two facts you can better understand what's happening with real estate, and how the market is improving.  In fact, home prices in many bay area cities increased slightly last month, giving hope that we may be near the bottom in the market.  When you see the headlines for home prices near the end of each month, keep an eye on the sales volume to get the complete picture.