Existing Homes Sales and Inventory Months of Supply (thru April 2013)

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NOTE: You may be reading an outdated analysis.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 April 2013 - 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

From January thru April 2013, supply was rising by about 0.29 months with each passing month – a confirmed upward trend (bad), and this reverses the trend that ended as of January.  We needed the May report to confirm an end to that trend.  While rising inventory levels are bad for home prices, it’s better not to get too low and throw things off equilibrium, which would be about the 6 month level.  We are already well below the equilibrium point for prices, which means existing home prices are pressured to rise in the near future.

Existing Homes Inventory Months of Supply April 2013 - Trends

Source: National Association of Realtors

Current Trend: Jan – Apr 2013.  During that time, there was a confirmed upward trend, with existing homes inventory supply rising by 0.29 months with each passing month. This is a new trend that reverses the previous falling (good) trend.

Last Confirmed Trend:  Apr 2012 – Jan 2013.  During that time, existing homes inventory supply was falling by 0.28 months with each passing month.

Projected Next Data Point

The next report is for May 2013.  If the recent trend (excluding any off trend data points) extends perfectly, the next value for months of supply of existing homes inventory would be about 5.4  for May 2013.  This would be very reasonable for next month, especially since inventory levels typically rise around this time of year.  We are still below a normal level of about 6 months, so no worries if this continues for now.

Easy Take

Right now, the existing homes market is on an upswing when examined properly.  Don’t let headlines from mainstream media outlets fool you into looking only at the total number of homes sold.  That is misleading.

With the latest report from April 2013, the existing homes sales inventory months of supply was again too high to include in the recent confirmed downward trend (good) from April 2012 thru January 2013.  Thus, that trend was broken and replaced with a new confirmed upward (bad) trend since January.  Given our current low level, though, I’m not worried that the months of supply is rising.  We’re still well below “normal” levels.  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.  The latest reading still sits below the equilibrium point, meaning that existing homes prices are positioned to rise 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 stayed low, although it did rise – probably due to expected seasonal factors.

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 percentage of overall sales that are “distressed sales” would represent a healthier housing market.  For April, that number was 18 percent, which was 3 percent lower than the previous month’s figure.

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 have stabilized in the existing homes sales market where it matters.  It’s gotten to the point now where inventory levels are so low that there is unusually high demand for the few homes out there.  That is contributing to faster growth in home prices for existing homes, which means that homebuilders will be more likely to build and sell homes.  And it’s the new homes that we really want to see selling, because those are what contribute much more to our GDP.

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 from their peak several years ago.  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 some time until all the “shadow inventory” can be sold off.