Housing Inventory Trends & Effects on Prices

September 2, 2009

by Scott Sambucci

3 comments

Turns out that whole “supply and demand” thing applies to the housing market.  Examining individual markets across the country, there’s a clearly visible trend – inventory levels are affecting the price levels of new homes entering the housing market every week.  The result is a downward shift in the national housing market’s price level as summer inventory quickly moves into Fall real estate season. Most importantly, the market price of new listings are preceding the directional trends of reported sold price data by 3-6 months. (Yes, I just used bold type there… This is important stuff.)

Why focus on the price of new properties entering the market each week?  Because these are the set of homes on the market that most closely represent the market clearly price in real-time.  As I mentioned in last week’s article focusing on the S&P/Case Shiller figures released for June 2009, new sellers entering the market use recently contracted prices at local level as a baseline for where they set their ask prices.   In this process, the price of new listings leads the directional trend of sold prices for homes still in contract and not yet closed – figures that won’t show up in the marketplace for several months.

A Look at the National Market

Throughout 2009, as we’ve documented on a number of occasions, overall national housing inventory has remained stagnant and has been declining every month since the start of the year. Housing inventory is also far below their 2007 and 2008 levels:

The Altos 20-City Composite tracks the Case-Shiller 20-market index

Chart of US Housing Inventory in the Altos 20-City Composite which tracks the MSAs as the S&P/Case-Shiller HPI

The number of properties exiting the market every week throughout 2009 has consistently exceeded new homes entering throughout the year:

Chart of US Housing Inventory in the Altos 20-City Composite which tracks the MSAs as the S&P/Case-Shiller HPI

Chart of US Housing Inventory in the Altos 20-City Composite which tracks the MSAs as the S&P/Case-Shiller HPI

A Tale of Two Cities (or Market Types)

1. Falling Housing Inventory Cases: San Diego & Phoenix

In looking through numerous cities across the country, the data shows cases of both rising and falling inventory levels this year depending on the market.  However in both cases, there’s a clear correlation between the housing inventory directional trend and the prices of new listings.

San Diego, CA

Throughout the Spring 2009, housing inventory (the orange curve) declined every week in San Diego. Additionally, new sellers consistently listed their homes and higher and higher prices (the green curve) throughout the Spring (lower supply –> higher prices).  This change in the inventory mix in San Diego drove up the overall market median ask price as well (represented by the black curve).

San Diego, CA
6-month chart of 90-day rolling averages of Active Housing Inventory, Median Price of New Listings, and Market Median Ask Price in San Diego, CA

Phoenix, AZ

Phoenix displayed sharply lower housing inventory levels throughout the Spring with sellers entering the market at consistently higher prices as well as witnessed in San Diego.

6-month chart of 90-day rolling averages of Active Inventory, Median Price of New Listings, and Market Median List Price
6-month chart of 90-day rolling averages of Active Housing Inventory, Median Price of New Listings, and Market Median Ask Price in Phoenix, AZ

6-Month Market Projections

Here’s the key going forward in both of these markets – take a close look at the housing inventory trends in both San Diego and Phoenix in July and August.  In both markets, the inventory declines have slowed and started to stablize.  In turn, it’s clear that this inventory stabilization is accompanied with a change in the price level curves of new homes hitting the market supply.  This is especially evident in San Diego where inventory is leveling off and the price of new listings is now starting to decline after rising throughout the Spring.

The market ask prices in San Diego are still rising as the change in the mix of active listings “catches up” and in Phoenix, market ask prices are already beginning to show a move downwards.

The S&P/Case-Shiller Home Price Index for San Diego & Phoenix showed increases  from May to June 2009 (+1.5% in San Diego; +1.1% in Phoenix), but look for these markets to take a turn back down when the index reports August numbers later this Fall.

2. Rising Housing Inventory Cases: Seattle, Cleveland & Houston

Seattle, WA

Seattle is showing in inverse of the San Diego and Phoenix markets highlighted above.  Housing Inventory rose throughout the Spring and new sellers entering the market each week since April consistently priced their homes at lower levels.

6-month chart of 90-day rolling averages for Active Inventory, Median Price of New Listings, and Market Median List Price

6-month chart of 90-day rolling averages for Active Inventory, Median Price of New Listings, and Market Median List Price in Seatte, WA

Cleveland, OH

Cleveland’s housing inventory turned upwards in May 2009 with new sellers responding with lower price levels about a month later (late June/early July). The S&P/Case-Shiller HPI reported a 4.2% increase from May to June, but don’t expect a continuation of home price increases as the year progresses.
6-month chart of 90-day rolling averages of Active Inventory, Median Price of New Listings, and Market Median List Price
6-month chart of 90-day rolling averages of Active Housing Inventory, Median Price of New Listings, and Market Median Ask Price in Cleveland, OH

Houston, TX

Houston is an interesting market – inventory levels moved higher early in the Spring, then stablized, then moved upwards again in late August.  The price of new listings declined slightly in the Spring and are now showing a significant decline starting in July before the August inventory bump.  These new listings are also impacting the market median ask prices which are now moving in a negative direction.

6-month chart of 90-day rolling averages for Active Housing Inventory, Median Price of New Listings, and Market Median List Price
6-month chart of 90-day rolling averages for Active Housing Inventory, Median Price of New Listings, and Market Median Ask Price in Houston, TX

Now What? – Applications & Next Steps

Taking a dive into more granular market areas such as zip codes, secondary market areas, and markets by price zone (yes, all avaiable on our Market & Data Analytics Platform of course…) with these data provides for a number of important market applications:

  • Whole Loan Portfolio Trades – Knowing the directional market trends in real-time instead of relying on lagging sold price data will reveal hidden buying opportunities where markets may be turning upwards, and will also uncover where to pass on loans in markets thought to be moving higher but in fact are experiencing short, Spring-time bounces (i.e. Phoenix, San Diego).
  • Mortgage Servicers – Like the Whole Loan Traders, knowing the directional trends will highlight where short-term upward movements exist to avoid mortgage workouts in markets that will only leave the borrower underwater again in 3-12 months.  Why spend time on borrowers that will be ready to walkaway again later this year?
  • Home Builders – Knowing where inventory levels are rising and falling provides immediate visibility about whether to initiate construction on land assets or to divest land assets before the market turns for the worse again.  Comparing the price of new listings and other market indicators for your target price zones will indicate demand levels in each market area.

There’s lots more heavy lifting to go with the underlying data and statistical analysis, but eyeballing a few market charts from the last six months seem to indicate that housing inventory serves as a leading indicator to price levels, and knowing the directional trend of new listing prices continue to show signs of leading sold price figures that tend to lag the market.

Comments, criticisms, arguments, yelling, and screaming are always welcome…

{ 2 comments }

Gregor September 2, 2009 at 10:27 am

Thankyou. Perhaps at some point you could address, however, the structural shadow inventory that so often lingers after the acute phase of a housing decline moves into its chronic phase, or the malaise phase. I personally suspect that the washout at the low end has been so massive that there may be much less of this shadow inventory at that level. Where the supply below the surface of the water is likely quite built up, however, at this point is in that medium to higher end.

G

Mike Simonsen September 2, 2009 at 11:54 am

Gregor – those are good insights and I generally agree. The “up” market of this spring looks from our data to be a function of two years of down cycle + stimulus + tax credit + low rates. That cleared a lot of the low end. But $8k doesn’t really help a $800k home purchase, so that’s where the stagnation is right now.

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