US housing inventory neutral for prices

21 Dec 2011 by Jim Fickett.

NAR have revised data back to 2007; this has only minor effects on inventory in months of supply, which correlates with prices. As of November, inventory has come down sufficiently that it no longer suggests falling prices, though it is too soon to call a new trend.

The National Association of Realtors released today revised data on existing home sales and inventory, spanning January 2007 to November 2011. The only NAR data that I depend on, the inventory in months of supply, showed only minor changes. In the following graph, revised data are shown as solid lines, and pre-revision data are shown as dotted lines.

The NAR include a methodology paper with today's release. It turns out that since 1999 they have been propogating sales and inventory levels forward, using the annual percent change in those numbers from a sample of regional MLS listings. It is not surprising that the absolute level has wandered quite far from reality. Their new procedure benchmarks the absolute level to survey data from the Census Bureau every few years (in the American Community Survey). This too has some issues – for example the survey includes information on when homeowners move, presumably indicating a sale, but the NAR just assume that the sales rate for rental properties is the same as for owner-occupied properties.

The inventory in months of supply showed little change because both the level of sales and the absolute level of inventory were distorted by the previous methodology in similar ways, so the ratio was largely unaffected. It is clear from the methodology that these numbers involve a fair amount of guesswork; nevertheless, the strong correlation with price moves is evidence that there is a connection with reality.

As of November, inventory has come down sufficiently that it is no longer suggesting falling prices. Given the large number of foreclosures in the pipeline, we certainly cannot count on that continuing. But for now, at least, inventory is consistent with stable, or even rising, prices.

I will update the correlation of inventory with prices next week when the Case-Shiller price index comes out.