Existing Homes Sales and Inventory Months of Supply (thru September 2012)

Most of homes sold are existing homes sales, so it is an important area of the housing sector to follow.  I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis.  Please visit my latest existing homes sales and inventory months of supply trend analysis for more info.

Quick ‘n Easy

Typically, if it would take longer than 6 months for the unsold inventory of existing homes (not newly built) to be sold at the latest pace of sales, we can expect prices for existing homes to go down.  If it’s less than 6 months, we can expect prices to go up.

You can get a sense for whether there are too many existing homes still on sale (inventory) by taking the total inventory and dividing it by the pace of sales.  The result is “months of supply,” which basically means that if existing homes were to continue selling at the same rate as the most recent month of data, the current inventory of homes would be sold by that many months.  A normal reading is around 6 months – higher number means too much inventory, and if supply is greater than demand, that usually means prices will drop.

Here’s a chart of the Existing Homes Inventory Months of Supply from Calculated Risk: (focus on the red line)

Existing Homes Months of Supply September 2012 - Calculated Risk

Courtesy: CalculatedRiskBlog.com

Existing Homes Sales Trends and Projections

Below, I will discuss whether the indicator is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released.Existing Homes Sales Trend Analysis

Quick ‘n Easy

The September report established a confirmed falling trend.  From June thru September, supply was falling by about 0.24 months with each passing month.  We are slightly below the equilibrium point for prices, which means existing home prices aren’t being pressured to fall in the near future.

Existing Homes Inventory Months of Supply September 2012 - Trends

Source Data: National Association of Realtors

Current Trend: Jun – Sep 2012.  During that time, there was a confirmed downward trend, with existing homes inventory supply falling by 0.24 months with each passing month.

Last Confirmed Trend:  Jan – Jun 2012.  During that time, existing homes inventory supply was rising by 0.09 months with each passing month.

Projected Next Data Point

The next report is for October 2012.  If the recent trend (excluding any off trend data points) continues, the next value for months of supply of existing homes inventory would be about 5.6  for October 2012.  It is probably difficult to move much lower from here, given that we’re essentially at normal values.  We’ll have to see what happens.

Easy Take

With the latest report from September 2012, the existing homes sales inventory months of supply established a confirmed downward trend (good) from June thru September.  Because inventory numbers are not seasonally adjusted, there are some seasonal patterns to what we see in the months of supply figure as well.  It is typically at its lowest in December and highest in the mid-summer.  Therefore, we should expect the number could move down from here, but because it’s already pretty low, that may be difficult to do at the same pace.

The latest reading (September 2012) sits slightly below the equilibrium point, meaning that existing homes prices are positioned to stay about the same or rise slightly in the near future.  Most media articles focus on the actual number of homes sold, but it’s not the number of homes sold that matters in this report.  Existing homes don’t generate much in the way of GDP.  Instead, what’s important is that the supply of existing homes isn’t too high, so that prices can be stable or rising slightly.  And for this month, that number improved.

Another component of the report that does warrant attention is the percentage of sales that were either a result of foreclosure or a short sale (where the bank accepts whatever they can get for the house and forgives the rest of the mortgage balance).  These are considered “distressed sales” – they put pressure on prices of homes because they represent situations where the seller is very eager to get rid of the house.  A lower the percentage of overall sales that are “distressed sales” would represent a healthier housing market.  For September, that number was slightly worse than August (24 percent vs 22 percent), but this has generally been improving of late.  Hopefully, it will not get worse next month.

If you compare inventory levels to the year before (see the Calculated Risk chart at the top of this post), you’ll see that inventory has been steadily declining since early 2011.  The bottom line here is that things are starting to reach a normal point with respect to price stability in the existing homes sales market.

Before assuming we’re out of the woods, remember that there are many homes in “shadow inventory” – that is, homes whose owners really want to sell but simply haven’t put them on the market because prices have dropped so low.  If we do see any hint of a price increase, there are plenty of these homes that might rush back onto the market, which means increased supply, which means lower prices.  In other words, we may not get to the point of rising prices for many years until all the “shadow inventory” can be sold off.

The economy desperately needs price stability moving forward.  But we are only talking about where things stand now.  If the economy were to experience a shock, there would be less demand for housing, more foreclosures, etc., all of which would contribute to months of supply going back up again and prices dropping again.