Wednesday, February 21, 2018

House Prices and Inventory

by Bill McBride on 2/21/2018 04:57:00 PM

This will be an interesting year for housing. With the tax changes - and rising mortgage rates - a key question is: What will be the impact on housing?

The answer is no one knows for sure. For the possible impact of tax changes on housing, see: Question #10 for 2018: Will the New Tax Law impact Home Sales, Inventory, and Price Growth in Certain States?

It is difficult to measure demand directly, but inventory is fairly easy to track. Watching existing home "for sale" inventory is very helpful. As an example, the increase in inventory in late 2005 helped me call the top for housing.

And the decrease in inventory eventually helped me correctly call the bottom for house prices in early 2012, see: The Housing Bottom is Here.

And in 2015, it appeared the inventory build in several markets was ending, and that boosted price increases. 

I don't have a crystal ball, but watching inventory helps understand the housing market.

Existing Home SalesClick on graph for larger image.

This graph below shows existing home months-of-supply (from the NAR) vs. the seasonally adjusted month-to-month price change in the Case-Shiller National Index (both since January 1999).

There is a clear relationship, and this is no surprise (but interesting to graph).

If months-of-supply is high, price decline. If months-of-supply is low, prices rise.

In the existing home sales report released this morning, the NAR reported months-of-supply at 3.4 months in January. Based on the historical relationship, months-of-supply could double before house prices started declining.

My current expectation is inventory will increase this year, and house price growth will slow a little.