CALCULATEDRISK
By Bill McBride
Two years ago, in November 2021, I wrote Inventory will Tell the Tale and recounted how changes in housing inventory had helped me forecast the housing market at several key points. Here is an update to that post with a few additional comments.
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 and from Realtor.com.
And I track inventory and sales for 40+ 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 five 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 above) was an indicator that price appreciation would increase.
Inventory in Late 2023
Here is a graph of active listings from Realtor.com through October. Note the surge in inventory in mid-2022 as mortgage rates increased.
However, the inventory surge in 2022 was somewhat of a head fake! Some potential sellers quickly listed their homes, probably remembering what happened with house prices in the 2006 to 2011 period, but that surge ended pretty quickly.
And here is a weekly graph from Altos Research showing that active single-family inventory was up 0.8% week-over-week as of November 3, 2023. This is the latest in the year that inventory has peaked in this series (series started in 2015).
However, according to the NAR, inventory was increasing through November back in 2005 – and really increased in 2006 (see 1st graph at top of post).
Inventory will likely be up year-over-year soon but still at historically low levels. Note that inventory is still down sharply from the years prior to the pandemic!
Of course, another way to look at inventory is months-of-supply. This graph is based on data from the NAR and uses seasonally adjusted sales, and NSA inventory. In general, months-of-supply is in the 4-to-5-month range during the spring and summer months and was at 3.4 months in September 2023.
In October 2019, inventory was at 1.77 million and sales were at 5.41 million (SAAR), putting the months-of-supply at 3.9. It is possible that the NAR report months-of-supply for October 2023 at 3.5 or 3.6 months – not that far below 2019 levels.
Still, prices don’t usually decline until inventory is close to 6 months-of-supply.
With higher mortgage rates and increasing inventory, a key question right now is “Will prices decline over the winter?”. I’ll update some price projections soon.
But I believe one thing is certain: inventory will tell the tale!