Read enough about the Phoenix (or elsewhere) real estate market, and someone will start spouting statistics. And while market stats are important to understand, one must exercise extreme caution in interpreting them, or listening to other’s interpretations (mine included!).

Let’s take a look at “Days on Market” (DOM), or “inventory”, or “months supply”. Whatever you prefer to call it, it is an oft cited indicator of overall market conditions. And generally speaking, it’s not a bad indicator. The supply of homes available for sale is a key component in understanding the overall real estate market conditions.

It is important to understand a few things though:

• Our current market really consists of three major categories of inventory: 1) Bank/lender owned homes (also known as REOs); 2) pre-foreclosure/ short sale properties; and 3) “normal” properties (homes that are owner/investor owned and not in  a pre-foreclosure status).
• Real estate is local. And the Phoenix metro area is a BIG place. Any time statistics or price indexes are quoted for the entire Phoenix area, you have to understand that conditions across the Valley can vary dramatically. Even within a suburb, conditions can vary from subdivision to subdivision. Within a single large Master Planned Community, conditions can vary from neighborhood to neighborhood.

The supply of homes is a perfect example. The general consensus in the real estate industry is that a six month supply of homes is considered a “balanced market”. Less than a six month supply means we are in a seller’s market and more than a six month supply is an indicator that we are in a buyer’s market.

At this moment in time, if you look at all the available inventory of homes across the Phoenix metro area, there is a 5.2 month supply of homes.

Months Supply of Homes: All areas and types:

If you’re a seller, you may be thinking, “Halleluiah! Phoenix is a seller’s market!” and if you’re a buyer you may be thinking, “Crap. I should have bought a home a couple of months ago when it was a buyer’s market and I would have had more negotiating power.”

Not so fast.

Let’s look at the categories of inventory that make up this number”¦

If you extract the data for just lender owned properties, you’ll see a much different picture.

Months Supply of Homes: Lender owned properties only:

Wow, there is only a 1.3 month supply of foreclosed homes. That indicates a very strong sellers market for foreclosed homes. A close examination of the data above shows you that foreclosure inventory is down, sales are up and pending sales (those homes under contract but not yet closed) are also up.

OK, so now you need to understand why these numbers are what they are. And sometimes the numbers alone won’t tell the whole story. Nothing in the chart above tells you that some large lenders and the Government Sponsored Entities Fannie Mae and Freddie Mac imposed moratoriums on foreclosures that are in the process of being lifted. Nothing in the numbers above tell you that there is still a lot of short sale/pre-foreclosure inventory ”“ much of which slips into the lender owned category when it doesn’t sell on the open market.

Months Supply of Homes: Pre-foreclosure / Short Sales only:

Almost 12,000 homes listed in a short sale position. ((Short sale: a sale in which the owner can not sell the property for what they owe. Banks always have to approve short sales. After all, they are the ones who are not getting the amount they loaned.)) And it would take 15.2 months to sell all the existing short sale properties ”“ if there were no more properties placed on the market.

The simple fact is, no home lasts for 15 months in a short sale position. The lender will foreclose long before that time period expires.

And what if you are a “normal” seller? Just the guy who owns their home and wants/needs to sell it. You aren’t in trouble with the payments, and you’ve got enough equity to sell at current values and repay your loan (and hopefully pocket a little cash at close).

Months Supply of Homes: Not lender owned or pre-foreclosure:

You my normal seller are still looking at a strong buyer’s market. Yes, sales and pending sales are trending up, but they are nowhere close to what they were last year and the year before. On average, you can expect it to take almost a year to sell your home. And guess what? You also get to compete with that foreclosed home across the street. The seller there is a bank that has probably already taken it in the shorts, they have no emotional investment in the home, and they’ve priced it very aggressively to get it off their books.

The Bottom Line

Not all statistics are as they appear, nor does any one stat tell the entire story. Consolidating all types of listings across an area the size of Phoenix metro into one number is usually very misleading.  Look closely at all real estate stats, keeping in mind that the variations across market segments and location can swing wildly (and change quickly). You should try to understand what the real estate market is like in your location, for your type of home in your situation. Just keep in mind that it is very easy to generalize and misinterpret real estate market stats, particularly the data that aggregate large areas of completely different property types.

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Tables from CromfordReport.com using data from public records and  data licensed from the Arizona Multiple Listing Service (ARMLS). Cromford Associates LLC, ARMLS and yours truly, Jay Thompson, expressly disclaim and make no representations or warranties of any kind ”“ express, implied or statutory ”“ as to the accuracy of the data, nor its merchantability or fitness for any particular purpose.

In other less legal-like words, if you use this data to make personal, business or investment decisions and something blows up, it’s not our fault and you can’t sue us.