Monday, September 24, 2007

Housing: Watch Inventory

by Bill McBride on 9/24/2007 11:41:00 AM

The August existing home sales report is scheduled to be released tomorrow.

Preliminary evidence suggests sales declined sharply in August. As an example, for California, DataQuick reported that August sales of new and existing homes declined 5% from July. The usual seasonal pattern is for sales to increase from July to August (by 5% to 10%), so on a seasonally adjusted basis, the decline in August is even more significant.

Also the NAR Pending Home Sales Index, based on contracts signed in July, was off 12%. The usual period from signing to closing is about 45 to 60 days for existing homes. This index is for contracts signed in July, so there will probably be some impact on the reported existing home sales for August, and even more of an impact on sales in the report for September.

But what about inventory?

The usual seasonal pattern is for inventory to peak in late summer. If 2007 follows the usual pattern, inventory levels in August will be about the same as the all time record set in July (4.592 million units). However 2007 isn't a "typical year" for housing, and it will be interesting to see if inventory levels follow the usual pattern - or continue to increase.

The other measure of inventory, "Months of Supply", will be through the roof!

The following graph shows existing home sales, inventory and months of supply since 1969 (inventory since 1982). Note: All data is end of the year, except 2007 is for July.

Existing Home Sales
Click on graph for larger image.

For July, months of supply was 9.6 months. Depending on how far sales fell in August, months of supply could be well over 10 months in August, just shy of the year end record set in 1982 (with 11.5 months at year end).

Sales will be the headline number in the report tomorrow, but inventory will also be interesting.