Just in Time Real Estate

2021-06-01 Just in Time

The current real estate market reminds me of something we learned in business school.

The corporate world was very focused on “Just in Time” supply chain logistics when we were earning our MBAs. The idea was that the most efficient way to run a business was to hold as little inventory as possible. Minimizing inventory had the benefit of minimizing expenses and minimizing space requirements, but it depended on regular inventory deliveries.

Consider water as an example product at a convenience store. Instead of holding enough bottles of water to last for a month of expected sales, the store would hold enough bottles for a week and take regular deliveries. With fewer water bottles on their shelves they not only reduce the amount of money they have invested in water, but they also have more shelf space for other products. As long as they received weekly deliveries they could sell the same amount of water.

The Greater Hartford real estate market is trying to operate in a Just in Time manner, even though it really shouldn’t.

There were 1,011 new listings in March 2021 and there were 1,029 new contracts. There were 1,144 new listings in April and there were 1,035 new contracts. My initial look at the data shows that the trend held for May as well. A house was listed, and then the house sold. The process repeated for basically all the new properties that were listed.

Unfortunately for all of us, houses are not interchangeable commodities like bottles of water. Every house is different, and there needs to be a baseline level of inventory available in order for the market to account for the different preferences of the buyer pool.

The consequence of a real estate market with little inventory (supply) and a deep buyer pool (demand) is that prices rise. We saw that in 2020 as the market pushed inventory levels downward throughout the year, and we are seeing it again in 2021 now that all the excess inventory has been bought.

Our only way out of this situation is more properties available for sale or fewer buyers hoping to buy. Neither seems like a near-term change that is likely to occur. We expect the status quo to remain for a while longer. There continues to be too few homes available for the number of buyers.