Monday, October 15, 2018

House Prices and Inventory

by Bill McBride on 10/15/2018 11:27:00 AM

This is an interesting year for housing. With rising mortgage rates (now above 5%), the tax changes, and immigration and trade policies, a key question is: What will be the impact on housing?

The answer is no one knows for sure. 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.

I don't have a crystal ball, but watching inventory helps understand the housing market.   And it appears inventory is increasing nationally, and increasing sharply in some areas (although still somewhat low historically).  For example:
Seattle Real Estate in September: Sales Down 29% YoY, Inventory up 78% YoY
Las Vegas Real Estate in September: Sales Down 16% YoY, Inventory up 33% YoY
Houston Real Estate in September: "Market Cools"
Sacramento Housing in September: Sales Down 15.5% YoY, Active Inventory up 23% YoY

Note: I'm trying to gather data for other areas.

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.

For August, the NAR reported months-of-supply at 4.3 months.  Based on recent reports, I expect months-of-supply to increase further in September (the NAR is scheduled to release September data this week).  Based on the historical relationship, months-of-supply could increase 50% before house prices start declining.