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Housing: Inventory will Tell the Tale
Altos Research Reports Inventory Above Peak in 2021, Still Historically Low
The first question I’m always asked about housing is What will happen with house prices? and then When will House Price Growth Slow? The exact impact on prices is uncertain (although I tried to answer both questions in the above links), but I believe one thing is certain: inventory will tell the tale!
That is why I watch inventory closely. Not just the monthly existing home sales report from the National Association of Realtors (NAR) and the monthly new home sales report from the Census Bureau. I also use weekly data from Altos Research (See Altos’ Mike Simonsen’s weekly presentation on YouTube) and from Realtor.com.
And I track inventory and sales for 30+ local markets each month.
This graph below shows existing home months-of-supply (inverted, from the NAR) vs. the seasonally adjusted month-to-month price change in the Case-Shiller National Index (both since January 1999 through March 2022). Note that the months-of-supply is not seasonally adjusted.
In March, the months-of-supply was at 1.9 months, and the Case-Shiller National Index (SA) increased 2.09% month-over-month. The black arrow points to the March 2022 dot. Since months-of-supply was at 2.2 months in April, the Case-Shiller index for April will still show strong year-over-year growth (to be released tomorrow).
In the May existing home sales report, the NAR reported months-of-supply increased to 2.6 months - still low, but we should expect house price growth to slow in the coming months.
Here are a few examples of when inventory helped me call some turning points (this is an update to a previous article last year):
Starting in January 2005, I was very bearish on housing, but I wasn’t sure when the market would turn. Speculative bubbles can go on and on. However, the increase in inventory in late 2005 (see red arrow on graph below) helped me call the top for house prices in 2006.
Several years later, in early 2012, when many people were still bearish on housing, the plunge in inventory in 2011 (blue arrow on graph below) helped me call the bottom for house prices in early 2012 (see The Housing Bottom is Here).
Over three years ago, in January 2018, I was quoted in a Bloomberg article that included a bearish outlook for housing. I disagreed, and the steady level of inventory helped (see orange arrow above):
Bill McBride, who runs the Calculated Risk blog and also called the crash, doesn’t think home prices are inflated this time around. Unlike in 2005, lenders are acting responsibly and the Wild West of real estate speculation hasn’t returned, he said. There is less to speculate on, too. Compared with the overbuilding that preceded the bust, today’s pace of construction isn’t fast enough, he said.
“Lending standards are still pretty good,” McBride said, and he doesn’t expect mortgage rates to “take off” in the short term.
And in December 2018, I disagreed with Professor Shiller A comment on Professor Shiller's "The Housing Boom Is Already Gigantic. How Long Can It Last?". My conclusion:
No big deal, and definitely not a "gigantic" boom in house prices.
In 2019, when several commentators were bearish on housing, I pointed out there was no sharp increase in housing inventory (like in 2005), and that was one of the reasons I remained optimistic on housing and the economy (correctly!).
And the sharp decline in inventory during the pandemic (green arrow) was an indicator that price appreciation would increase. Inventory declined due to a combination of potential sellers keeping their properties off the market during a pandemic, and a pickup in buying due to record low mortgage rates, a move away from multi-family rentals and strong second home buying (to escape the high-density cities). And at the same time, demographics were favorable for home buying (a large cohort has moved into the peak home buying years).
Recently rising mortgage rates have slowed the housing market and inventory is increasing quickly, but still historically low.
Altos Research Reports Inventory Above Peak in 2021
This morning Altos Research released inventory data as of June 24th showing that current inventory is above the peak in 2021.
Inventory was at 444 thousand (7-day average), compared to the peak in 2021 of 437 thousand in September 2021. Inventory was up 6.1% from 419 thousand the previous week. Inventory is increasing much faster than normal for this time of year (both in percentage terms and in total inventory added).
Inventory is still historically low. Compared to the same week in 2021, inventory is up 23.6% from 359 thousand, however compared to the same week in 2020 inventory is down 34.3% from 677 thousand. Compared to 3 years ago (2019), inventory is down 54.4% from 976 thousand.
Here are the inventory milestones I’m watching for with the Altos data:
The seasonal bottom (happened on March 4th for Altos) ✅
Inventory up year-over-year (happened on May 13th for Altos) ✅
Inventory up compared to two years ago (currently down 34.3% according to Altos)
Inventory up compared to 2019 (currently down 54.4%).
Here is a graph of the inventory change vs 2021, 2020 (milestone 3 above) and 2019 (milestone 4). The blue line is the year-over-year data, the red line is compared to two years ago, and dashed purple is compared to 2019.
Two years ago (in 2020) inventory was declining all year, so the two-year comparison will get easier all year. Based on recent increases in inventory, my current estimate is inventory will be up compared to 2020 in Q3 of this year (in the next few months), and back to 2019 levels at the beginning of 2023.
Inventory will tell the tale! I’ll have more on house prices tomorrow.
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