Inventory will Tell the Tale

We are being flooded with housing stories. Will house prices decline or will price growth just slow? Does the US have a housing shortage? If mortgage rates rise to 4%, will that “halt the housing market” as Ivy Zelman said on CNBC?

Although my crystal ball is cloudy at this point, I believe 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 I track inventory and sales for 30+ local markets each month.

Here are a few examples of when inventory helped me call some turning points:

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).

It is possible that rising mortgage rates will slow the housing market. Or a sharp decline in some of the more speculative investment sectors might spill over into housing. Or the Fed might raise rates sooner than expected due to the recent pickup in inflation.

My Spidey senses are tingling, however it isn't obvious why this time - or what the outcome will be.

But I believe one thing is certain: inventory will tell the tale!

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