Watch Months-of-Supply!
Both inventory and sales are well below pre-pandemic levels, and I think we need to keep an eye on months-of-supply to forecast price changes. Historically nominal prices declined when months-of-supply approached 6 months - and that is unlikely any time soon - however, as expected, months-of-supply is above 2019 levels.
Months-of-supply was at 4.3 months in September compared to 4.0 months in September 2019. Even though inventory has declined significantly compared to 2019, sales have fallen even more - pushing up months-of-supply.
The following graph shows months-of-supply since 2017. Note that months-of-supply is higher than the last 5 years (2019 - 2023), and just below the level in September 2018. Months-of-supply was at 4.2 in September 2017 and 4.4 in September 2018. In 2020 (black), months-of-supply increased at the beginning of the pandemic and then declined sharply.
Note the seasonal pattern. I’m using the NSA months-of-supply, and that will decline over the next few months before increasing in the Spring.
The Case-Shiller National index increased 6.2% in 2017, 4.6% in 2018, and 3.8% in 2019. In 2023, we saw some price declines at the National level even with fairly low months-of-supply - probably due to the sharp increase in inventory.
The following table shows the Months-of-supply (NSA) and the year-over-year house price change (Case-Shiller National Index) for June and December. The relationship isn’t perfect, but generally more inventory equals smaller price increases.
If months-of-supply is near 4 months in December - and above 2018 levels - then there is a good chance we will see 5+ months-of-supply by next June. And that might mean soft prices. That is something I’ll be watching carefully.
Bill,
The outlook for interest rates is pretty dismal if large deficits are the rule of the day in the Trump administration. China will have no appetite to purchase US bonds given tariff trade war. Who will pick up the slack unless there are higher interest rates? Since mortgage rates are tied to the 10 year Treasury, it doesn't look good for first time homebuyers. The other thing that is happening in our area (Bethesda, MD) is there is no moderately priced dwelling units being built. Even new appartment buildings are expensive and older buildings are being torn down for new construction. We have eight four story brick apartments that were built in the early 1950s that are slated for demolition. Their replacement will likely have rents 30% higher.
I can understand why there is so much outrage about this issue but I'm not sure the Federal government can do much about it. Our county is pushing hard for increasing housing density but those in single family dwellings don't want to see this in their neighborhood.