Economists look at whether, overall, inventory levels are rising or falling and then use this as part of predicting what the economy is likely to do. A fall in inventory levels generally means that manufacturers are not producing enough to meet the needs of consumers and will have to look to selling their previously manufactured inventory to keep up with consumer demand. If this trend continues, manufacturers will run out of stored goods and will ramp up production to meet demand. A falling inventory is a good predictor of future rises in production, with the flow-on benefit of the payment of more wages and the buying of more raw materials.
Overall, then, a good thing.
How does this apply to you? Well, imagine you are a shop owner. You get in goods, put them on the shelf, and sell them. You compete aggressively to get customers to buy your goods through good branding, targeted advertising, pricing your goods correctly, and with great service.
Your aim is to sell more goods than your competition through meeting the needs of the market and having just the right goods for those needs.
Of course, your ‘goods’ are properties but the principles apply – good branding, targeted advertising, pricing to the market and providing great service.
Can you then track your ‘inventory levels’ and work out if you are meeting the market’s needs? Do you know if your inventory is growing or shrinking and how this compares to the overall market inventory? Can you predict your future? Can you influence your future?
A good way to measure inventory is to look at ‘effective supply’ in months of listings. If no more listings appeared on the market and the current sales volumes were maintained, how long would it take to sell all the remaining properties? The RP Data Suburb Scorecard, or RP Professional can both provide answers. As an example, using RP Professional, the total sales in Chatswood NSW in November 2013 was 79. Currently there are 160 properties listed for sale, so effective supply for Chatswood is 160 divided by 79, or just over two months.
If you are an agent in Chatswood, are you turning over your inventory every two months? Are you taking longer or shorter?
Another important item to look at is the trend in inventory. For Chatswood using Suburb Scorecard will show the number of sales is rising faster than the number of new listings, meaning that inventory is getting ‘run down’ or demand is exceeding supply. This is reflected in the low ‘effective supply’ measure of only two months.
Is this useful to you? I think absolutely! It helps you know how you are going, where the market is trending and assists you in targeting your buyers and vendors appropriately. In a market where effective supply is dropping, you know getting listings is going to be hard and will get harder, so planning and focusing on getting more listings must have high priority. In the opposite market, where effective supply is increasing, a focus on sales and effective management of existing listings is more applicable.
Also, measure yourself against the market to know how efficient you are. Use that in conversations with vendors and buyers to show just how well you do know the market and to also help make sales. 'More properties are coming onto the market than are selling' is a strong argument to a vendor to take a good offer now rather than wait for a better offer tomorrow that may not come. Conversely, 'More properties are selling than listing, there is not that much out there' will help get a hesitant buyer over the line.
Hopefully you are better at predicting and then managing your future than some economists are at predicting our economy!