Housing: Inventory is the Key Metric in 2021
Usually inventory peaks in the Summer, and then declines into the Fall. Will inventory follow the normal seasonal pattern in 2021, or will inventory continue to increase over the coming months? This will be important to watch for house prices and housing activity.
Watching existing home "for sale" inventory is very helpful. As an example, during the speculative housing bubble, it wasn’t clear when the bubble would end. However, 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.
This graph, based on data from the National Association of Realtors® (NAR), shows nationwide inventory for existing homes since 1999.
The red arrow on the graph shows the increase in inventory in the 2nd half of 2005 (when I called the top for housing activity). And the blue arrow shows the sharp decline in inventory in late 2011, that helped me call the bottom for prices in early 2012.
The black arrow shows the current level of inventory (July 2021).
In 2020, with the pandemic, inventory dropped to record lows, and prices really increased.
Demand is important too
Of course demand is important too. Demographics have been very favorable for home buying, and there has been significant investor and second home buying, and near record low mortgage rates and a strong stock market that has also boosted demand. I’ll write more on demand soon.
However the key metric for housing in 2021 will be inventory. If inventory stays extremely low, there will be more housing starts and a larger increase in house prices. However, if inventory increases significantly, there will be fewer starts and less price appreciation.
There are three measures of inventory that I’m currently using: the NAR monthly report, the weekly report from Altos Research, and monthly local inventory reports for 30 cities and states.
National Association of Realtors® (NAR) Inventory
The NAR reported that inventory was down 12% year-over-year.
Total housing inventory at the end of July totaled 1.32 million units, up 7.3% from June's supply and down 12.0% from one year ago (1.50 million). Unsold inventory sits at a 2.6-month supply at the present sales pace, up slightly from the 2.5-month figure recorded in June but down from 3.1 months in July 2020.
This graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.
However, it is likely the NAR is overstating inventory since many MLSs include pending in the number of listings (as opposed to just active listings). As housing economist Tom Lawler has noted, the local MLS data shows even a larger decline in active inventory (the NAR appears to include some pending sales in inventory). Lawler noted:
"As I’ve noted before, the inventory measure in most publicly-released local realtor/MLS reports excludes listings with pending contracts, but that is not the case for many of the reports sent to the NAR (referred to as the “NAR Report!”), Since the middle of last Spring inventory measures excluding pending listings have fallen much more sharply than inventory measures including such listings, and this latter inventory measure understates the decline in the effective inventory of homes for sale over the last several months."
My sense is active inventory is down close to 30% year-over-year, and maybe down close to 50% from two years ago.
Altos Research Inventory
Mike Simonsen CEO of Altos Research provides me with weekly inventory data from their research. Here is a graph of data that was released this morning.
As of August 27th, inventory was at 431 thousand (7 day average), compared to 592 thousand for the same week a year ago. That is a decline of 27.1%.
Compared to the same week in 2019, inventory is down 56%.
A week ago, inventory was at 422 thousand, and was down 27.3% YoY. Seasonally, inventory has bottomed. Inventory was about 40.7% above the record low in early April.
A couple of interesting points from 2019: In 2019, inventory bottomed at 814 thousand in February (so inventory is still very low compared to normal levels). And, in 2019, inventory peaked at 972 thousand in early August (an increase of about 19% from the low). So inventory is less than half of what we'd normally expect, however inventory has increased (as a percentage) more than normal.
Local Market Inventory
I’m currently tracking inventory and sales for 30 local markets (states and cities). If you’d like to track inventory in your area, I suggest using Realtor.com and tracking listing in your zip code (although they include pending sales), or Zillow Research.
Here are the 30 local markets I’m tracking. This table include the change from last month (June 2021), and the year-over-year change in inventory from July 2020. This is mostly active inventory, but some of this data may include pending sales.
For these markets in July 2021, inventory was down 31.8% year-over-year, and up 9.2% from the previous month (June 2021). Inventory is up about 28% from the minimum for these markets (although markets hit their record lows in different months earlier this year).
I’ll be posting some inventory data weekly. My sense is active inventory is down about 30% year-over-year, and currently I expect inventory will be up year-over-year late this year (but still historically very low).
I’ll discuss house prices tomorrow.