by Bill McBride on 3/05/2013 12:39:00 PM
Tuesday, March 05, 2013
Since bottoming 12 months ago, national asking home prices rose 7.0 percent year-over-year (Y-o-Y) in February. Seasonally adjusted, asking prices also increased 1.4 percent month-over-month (M-o-M) and 3.0 percent quarter-over-quarter (Q-o-Q) – marking two post-recession highs. Asking prices locally are up in 90 of the 100 largest U.S. metros, rising fastest in Phoenix, Las Vegas, and Oakland.More on inventory from Jed Kolko, Trulia Chief Economist: Rising Prices Mean Falling Inventory … in the Short Term
Meanwhile, rent increases are slowing down. In February, rents rose just 3.2 percent Y-o-Y. This is a notable decrease from three months ago, in November, when rents were up 5.4 percent Y-o-Y. Among the 25 largest rental markets, rents rose the most in Houston, Oakland, and Miami, while falling slightly in San Francisco and Las Vegas.
Inventory Will Not Turn Around in 2013 Even Though Decline Is Slowing Down
Inventory falls most sharply just after prices bottom, creating an “inventory spiral”: rising prices reduce inventory as would-be home sellers hold off in the hopes of selling later at a higher price, and falling inventory boosts prices further as buyers compete for a limited number of for-sale homes. Nationally, the annualized rate of inventory decline was 23 to 29 percent from March to September 2012, the months after home prices first bottomed one year ago, but has softened to a 14 to 21 percent rate since October 
Inventory and prices affect each other in three ways:These are important points on inventory, and I now think inventory will not bottom this year (this is why I've been tracking inventory weekly). This probably means more price appreciation in 2013 than most analysts expect (I think the consensus was around 3% price increase in 2013), and this is also positive for new home sales.
1.Less inventory leads to higher prices. That’s because buyers are competing for a limited number of for-sale homes.In the short term, the first two reasons create an “inventory spiral”: less inventory leads to higher prices, which leads to less inventory, and so on. But the inventory spiral can’t go on forever because eventually rising prices will encourage homeowners to sell and builders to build, which add to inventory and breaks the spiral. The critical question for the housing market – especially for buyers fighting over tight inventories – is how long until that kicks in? How long do prices have to rise before sellers and builders start adding to inventory?
2.Higher prices lead to less inventory – at least in the short term. Everyone wants to buy at the bottom; no one wants to sell at the bottom. When prices start to rise, buyers get impatient while many would-be sellers want to hold out in the hopes of selling later at a higher price.
3.Higher prices lead to more inventory – in the long term. As prices keep rising, more homeowners decide it’s worthwhile to sell, especially those who get back above water, which adds to inventory. Also, builders take rising prices as a cue to rev up construction activity, which also adds to inventory.
How long until inventory turns positive, rather than becoming just less negative? ... it could be at least another year until national inventory starts expanding. Of course, inventory will probably turn up this spring and summer because of the regular seasonal pattern, but the underlying trend will be less inventory than is typical for each season, not more.
Note: These asking prices are SA (Seasonally Adjusted) - and adjusted for the mix of homes - and this suggests further house price increases over the next few months on a seasonally adjusted basis.
Posted by Bill McBride on 3/05/2013 12:39:00 PM