Wednesday, September 08, 2010

Lawler: Again on Existing Home Months’ Supply: What’s “Normal?”

by Bill McBride on 9/08/2010 04:49:00 PM

CR Note: This is from economist Tom Lawler.

It has become “common practice” when talking about the “months’ supply” of existing homes for sale for folks to say that the “normal” months’ supply, or the months’ supply that means it is neither a “buyers” or a “sellers” market, is around 6 to 7 months. Yet here is the history of months’ supply for existing SF homes from the National Association of Realtors.

Existing Homes Month of Supply Click on graph for larger image in new window.

As one can see, this “metric” actually has not been in the six-to-seven month range very often. From mid-1982 through 1992, the months’ supply measure was above seven months in all but a handful of months, while from 1998 to the spring of 2006 it was always below six months.

The measure, of course, is quite volatile, and sorta weird in that the inventory number (the numerator) is not seasonally adjusted while the sales data (the denominator) is seasonally adjusted. The measure also can be extremely volatile as sales tend to be impacted more by “special factors” (weather, tax credits, etc.) than listings.

But the measure is only one of many measures that may be “indicative” of “excess” supply, and it probably isn’t even close to the best measure. However, it is the most timely, so folks watch it closely – but sometimes place WAY to much meaning in month-to-month swings.

CR Note: The above was from economist Tom Lawler.

From CR: I'm one of the people who has called 6 to 7 months a "normal" months-of-supply. As the graph above shows, it is hard to define a normal based on the last 30 years.

I've heard the 6 to 7 months metric for years - and it fits the data I have. Perhaps the idea that 6 to 7 months is "normal" comes from new home inventory.

New Home Months of Supply and Recessions This graph shows new home inventory back to 1963 (unfortunately Tom Lawler's graph only goes back to 1982).

For new homes, it does look like around 6 months supply is normal. I suspect if the existing home graph went back to the '60s, something like 6 months would be normal.

Lawler's caution is something to keep in mind. But double digit months-of-supply is clearly very high.