Tuesday, December 28, 2010

House Prices and Months-of-Supply, and Real House Prices

by Bill McBride on 12/28/2010 11:35:00 AM

This morning S&P/Case-Shiller released the monthly Home Price indexes for October (a three month average). Here is a look at house prices and existing home months-of-supply, and also real house prices (2nd graph).

House Prices and Months-of-Supply Click on graph for larger image in graph gallery.

This graph shows existing home months-of-supply (left axis), and the annualized change in the Case-Shiller composite 20 house price index (right axis, inverted).

House prices are through October using the composite 20 index. Months-of-supply is through November.

We need to watch inventory and months-of-supply closely for hints about house prices. The recent surge in existing home inventory - and increase in the months-of-supply - is one of the reasons I expected house prices to fall another 5% to 10%. S&P is also forecasting additional price declines.

Note: there have been periods with high months-of-supply and rising house prices (see: Lawler: Again on Existing Home Months’ Supply: What’s “Normal?” ) so this is just a guide.

The following graph shows the Case-Shiller Composite 20 index, and the CoreLogic House Price Index in real terms (adjusted for inflation using CPI less shelter).

Real House PricesIn real terms, both indexes are back to early 2001 prices. Also both indexes are at post-bubble lows.

A few key points:
• This is worth repeating: the real price indexes are at post-bubble lows. Those who argued prices bottomed some time ago are already wrong in real terms, and will probably be wrong in nominal terms soon.
• Don't expect real prices to fall to '98 levels. In many areas - if the population is increasing - house prices increase slightly faster than inflation over time, so there is an upward slope in real prices.
• Real prices are still too high, but they are much closer to the eventual bottom than the top in 2005. This isn't like in 2005 when prices were way out of the normal range.
• With high levels of inventory, prices will probably fall some more. (I'll update my price forecast soon).