Here’s What to Focus On

To get a good idea, when the level of homes available for sale divided by the recent average monthly rate of sales equals less than six, it usually would be an indication that the market is slightly favoring sellers. When that ratio reaches a 5-month level of inventory it definitely favors sellers. As long as that remains the case prices are very likely to have an upward bias.

Anecdotally, when buyers are showing signs of growing frustration, and when there is an increase in the number of multiple offers, the emotional climate is one that favors sellers.

The inquirer asked me how it was that most of the news he read or heard indicated that there was still a large “shadow inventory” of bank-owned or financially-stressed property owners and that these circumstances were still leading to lower prices.

What is “Shadow Inventory?”

There is a “shadow inventory” of homes that most likely will gradually come on the market over the next year. However, I think we have a strong enough local market that will readily absorb those few properties that will continue to come onto the market on a steady basis. Moreover, I have noticed in previous down markets that Pacific Palisades tends to lead many of the other areas in Los Angeles in the price recovery process.

There really are no easy sources or directions to look in to obtain such market information or turning points. It is much more a matter of observation and consideration of cyclical trends as well as being sensitive and alert to the emotional state of buyers and to the psychology of how that translates into real estate market impact.

Psychology of the Market Plays a Part

There is an identifiable psychological component as it relates specifically to sellers in any market environment. Sellers may tend to overreact with fear-driven reactions or have unrealistic expectations as to the current fair market value of their home.

When motivated by unrealistic expectations, owners frequently do not succeed in selling their homes, even in a market that is characterized by strong buyer interest and readily available financing that enables them to make purchases.

Not many people are aware that during the last 12 months approximately 50% of the Pacific Palisades homes that came on the market failed to sell or have not sold yet.