Wednesday, December 22, 2010

Existing Home Inventory increases 5.4% Year-over-Year

by Bill McBride on 12/22/2010 11:15:00 AM

Earlier the NAR released the existing home sales data for November; here are a couple more graphs ...

The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change.

IMPORTANT: On a seasonal basis, inventory usually bottoms in December and January, and then will start increasing again in February and March. Since the NAR "months-of-supply" metric uses Seasonally Adjusted (SA) sales, but Not Seasonally Adjusted (NSA) inventory, this seasonal decline in inventory will lead to a lower "months-of-supply" in December and January. I expect inventory in December to decline to around 3.4 million units, and the months-of-supply to fall to the mid-to-high 8s.

The key is to recognize the seasonal pattern, and watch the YoY change in inventory.

Year-over-year Inventory Click on graph for larger image in graph gallery.

Although inventory decreased from October to November, inventory increased 5.4% YoY in November.

The year-over-year increase in inventory is especially bad news because the reported inventory is very high (3.71 million), and the 9.5 months of supply in November is well above normal.

Existing Home Sales NSA By request - the second graph shows existing home sales Not Seasonally Adjusted (NSA).

The red columns are for 2010.

Sales NSA were slightly above the level in 2008, but well below the level in other years.

The bottom line: Sales were weak in November - below consensus and close to Tom Lawler's forecast - and existing home sales will continue to be weak for some time.

Inventory is very high, and the year-over-year increase in inventory is very concerning. The high level of inventory will continue to put downward pressure on house prices.