Friday, July 30, 2010

Existing Homes: Double Digit Months-of-Supply Watch

by Calculated Risk on 7/30/2010 03:44:00 PM

How the NAR calculates existing home inventory is a bit of a mystery. However housing economist Tom Lawler has been tracking inventory several different ways. For July, Lawler reports listings totaled 4,038,133, up about 1.6% from June (using Realtor.com). And this brings us to the double digit months-of-supply watch ...

For June, the NAR reported sales were at a 5.37 million seasonally adjusted annual rate (SAAR), and inventory was at 3.992 million.

To calculated the months of supply, divide 3.992 by 5.37 and multiply by 12 months.

This gives 8.92 months-of-supply (note: there is a seasonal pattern for inventory, but the NAR uses the NSA data).

Existing Home Sales Months of SupplyClick on graph for larger image in new window.

This graph shows the 'months-of-supply' metric.

The NAR reported that the months-of-supply increased to 8.9 months in June.

Since we know sales collapsed in July (based on pending home sales and other reports), and using Lawler's estimate for the level of inventory, we can calculate how far sales would have had to fall in July to hit double digits months-of-supply:

For: Months of SupplyThen: July Sales (millions, SAAR)
104.85
114.40
124.04

For 12 months of supply, the sales rate (SAAR) would equal inventory.

My initial guess is we will see double digit months-of-supply in July, and for a number of the months thereafter. We might even break the cycle high of 11.2 months set in 2008. If months-of-supply increases sharply as I expect, then there will be additional downward pressure on house prices.