by Calculated Risk on 12/26/2016 07:27:00 PM
Monday, December 26, 2016
Earlier I posted some questions for next year: Ten Economic Questions for 2017. I'll try to add some thoughts, and maybe some predictions for each question.
10) Housing Inventory: Housing inventory declined in 2015 and 2016. Will inventory increase or decrease in 2017?
Tracking housing inventory is very helpful in understanding the housing market. The plunge in inventory in 2011 helped me call the bottom for house prices in early 2012 (The Housing Bottom is Here). And the increase in inventory in late 2005 (see first graph below) helped me call the top for house prices in 2006.
This graph shows nationwide inventory for existing homes through November 2016.
Click on graph for larger image.
According to the NAR, inventory decreased to 1.85 million in November 2016 from 2.04 million in November 2015.
This was the lowest level for the month of November since 2000.
Inventory is not seasonally adjusted, and usually inventory decreases from the seasonal high in mid-summer to the seasonal lows in December and January as sellers take their homes off the market for the holidays.
The second graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.
Inventory decreased 9.3% year-over-year in November compared to November 2015. (blue line). Note that the blue line (year-over-year change) turned slightly positive in 2013, but has been negative since mid-2015.
Two of the key reasons inventory is low: 1) A large number of single family home and condos were converted to rental units. Last year, housing economist Tom Lawler estimated there were 17.5 million renter occupied single family homes in the U.S., up from 10.7 million in 2000. Many of these houses were purchased by investors, and rents have increased substantially, and the investors are not selling (even though prices have increased too). Most of these rental conversions were at the lower end, and that is limiting the supply for first time buyers. 2) Baby boomers are aging in place (people tend to downsize when they are 75 or 80, in another 10 to 20 years for the boomers). Instead we are seeing a surge in home improvement spending, and this is also limiting supply.
Of course low inventory keeps potential move-up buyers from selling too. If someone looks around for another home, and inventory is lean, they may decide to just stay and upgrade.
I've heard reports of more inventory in some coastal areas of California, in New York city and for high rise condos in Miami. But we haven't seen a change in trend for inventory yet.
The recent increase in interest rates might impact inventory. Looking back at the "taper tantrum" in May and June 2013 suggests we might see more inventory in the coming months. In May 2013, inventory was down 13% year-over-year, but by September 2013, inventory was unchanged year-over-year. However that change in year-over-year inventory was part of an ongoing trend (look at 2013 in the second graph above), and the "taper tantrum" might not have been the cause.
I was wrong on inventory last year, but right now my guess is active inventory will increase in 2017 (inventory will decline seasonally in December and January, but I expect to see inventory up again year-over-year in December 2017). My reasons for expecting more inventory are 1) inventory is historically low (lowest for November since 2000), 2) and the recent increase in interest rates.
If correct, this will keep house price increases down in 2017 (probably lower than the 5% or so gains in 2014, 2015 and 2016).
Here are the Ten Economic Questions for 2017 and a few predictions:
• Question #1 for 2017: What about fiscal and regulatory policy in 2017?
• Question #2 for 2017: How much will the economy grow in 2017?
• Question #3 for 2017: Will job creation slow further in 2017?
• Question #4 for 2017: What will the unemployment rate be in December 2017?
• Question #5 for 2017: Will the core inflation rate rise in 2017? Will too much inflation be a concern in 2017?
• Question #6 for 2017: Will the Fed raise rates in 2017, and if so, by how much?
• Question #7 for 2017: How much will wages increase in 2017?
• Question #8 for 2017: How much will Residential Investment increase?
• Question #9 for 2017: What will happen with house prices in 2017?
• Question #10 for 2017: Will housing inventory increase or decrease in 2017?