Failure can be a great motivator, and let’s hope that’s the case for the real estate market. Boy is that a crazy industry right now. I don’t usually delve into real estate on the Inventory System Software Blog, but I’m going to make an exception because it’s such an extraordinary example of poor inventory management. There’s a lot we can learn from it.
In the CNN article “Foreclosures for sale: Big supply, low prices,” it starts by saying, “There’s a three-year inventory of homes in foreclosure for sale, and that’s devastating home prices.”
Despite all the efforts to stabilize home prices, no one can stop the invisible hand of supply and demand from doing its job. There are too many homes owned by people who couldn’t afford them, which need to be sold to stable buyers before prices can stabilize. It’s Economics 101.
If any business, like a food producer or clothing retailer, stocks up on too many products, it will eventually have to sell its excess inventory at a big discount before it spoils or goes out of season. It’s much better to keep just enough products in stock to meet demand.
Not Enough Demand
It could take three years to sell the current inventory of 1.9 million foreclosed and otherwise distressed homes, according to the CNN article. That’s a terrible inventory turnover ratio. And it doesn’t even include all the non-foreclosed homes on the market.
An inventory turnover ratio is how many times a company sells its average inventory total in one year. Usually, the higher the ratio, the better because a low ratio means products are sitting idly in a warehouse. If demand falls then companies need to adjust their inventory so their inventory turnover ratio doesn’t get too low. It’s not easy to reduce the number of homes in existence, but most companies don’t have such a big problem. An inventory of smaller products is much more flexible to work with.
What to Do
The housing market is a serious case of “Don’t let this happen to you.” As demand and prices increased rapidly in the last decade, homebuilders kept adding more homes to the market to try and keep up. But the demand and price increases were unsustainable, so when they eventually dropped, the industry was caught unprepared.
You don’t want to be stuck with a whole bunch of inventory you can’t sell, so you need to stay on top of business trends. If you have the right tools you can see the signs of changes in supply and demand and plan accordingly. One tool that is indispensable is Fishbowl’s inventory management software. Fishbowl analyzes your historical data on sales and orders, and points out seasonal patterns. This helps you stock up on the right products at the right times instead of just guessing.
By using Fishbowl and some good old-fashioned common sense, you can learn from others mistakes and keep your business going strong.