The Decline In Inventory Right Now is NOT a Good Sign
Posted by Jonathan J. Miller -Monday, February 13, 2012, 6:00 AM
16 Comments
There was a 21.2% decline in listing inventory from December 2010 to December 2011.
Relying on typical housing market scenarios and reasonable logic, a decline in listing inventory nearly always meant a tightening market was developing – fewer houses coming on line matched against steady demand meant housing prices were more likely to stabilize or rise.
Declining inventory is the variable in the housing equation that usually makes conditions improve. During the mid-decade housing boom, falling inventory was caused by the insatiable demand by buyers – product could not get out to the market fastest enough. Listing inventory was simply “worked off” by (artificially) inflated demand. Listing discounts approached zero, days on market fell to record lows and prices rose rapidly.
Old scenario: Declining Listing Inventory = declining housing prices ease their decline, prices stabilize or prices rise.
However over the last year, listing inventory fell sharply in many markets yet sales were generally anemic or showing nominal increases. In the NAR numbers, non-seasonally adjusted sales were up 1.4% year over year (using NSA since inventory is also NSA) yet inventory was down 21.2%. Inventory was clearly not declining because sales were overpowering the amount of listing inventory that was available.
Then why is inventory declining?
The answer to this question was not considered in the recent prediction of a market bottom.
New scenario: Declining Listing Inventory = fall in seller confidence and the sharp decline in distressed inventory entering the market.
From NAR…
Total housing inventory at the end of December dropped 9.2 percent to 2.38 million existing homes available for sale, which represents a 6.2-month supply2 at the current sales pace, down from a 7.2-month supply in November.
“The inventory supply suggests many markets will see prices stabilize or grow moderately in the near future,” Yun said. – National Association of Realtors
We are seeing unusual declines in many markets I keep tabs on such as:
- Baltimore, MD Down 21.6% YOY
- Washington, DC Metro Down 35.8% YOY
- Las Vegas Down 12.9% YOY
- Broward County, FL Down 35% YOY
- Miami-Dade Down 40% YOY
- ReMax National down 25.7% YOY
- Phoenix (Realtor.com) down 48% YOY
- Boise City, Idaho (Realtor.com) down 41% YOY
Admittedly I am cherry picking some of the cities that are posting huge declines in inventory. However the problem I find in all of these markets, is that sales are only increasing a few percentage points. Not nearly enough to explain the rapid decline.
The drops are being touted as a good sign that housing is getting back on its feet. I’m not so sure.
I think the sharp drop in many US housing markets (and this has been happening for much of 2011) has to do with three key reasons:
- A large swath of foreclosure volume was artificially delayed.
- Seller confidence has waned after the pounding it took last fall.
- Low interest rates extended by the Fed for the next two years have removed any sense of urgency.
Declining foreclosure volume is one of the key reason inventory levels are dropping. The 1/3 decline in foreclosure volume in 2011 has resulted in a sharp drop in foreclosure inventory resulting in a sharp drop in total inventory. Distressed sales have been running at about 30% of total sales nationally for a few years but fell to about 20% in 2011. With a 2 million more homes expected to go into foreclosure over the next 2 years, a year long internal review of procedure after the 2010 “robo-signing” scandal and the 50 State AG settlement with the largest services/banks, distressed inventory is expected to rise sharply over the next several years.
Weak seller confidence is causing property not to be released into the market unless the need to sell is not optional. The 2011 home seller and buyer was bashed with the debt ceiling debate, the S&P downgrade of US debt, 400 point daily swings in the financial markets, the European debt crisis, the AG/Service settlement drama and the political stalemate on housing policy in Washington. What do people do when faced with the unknown? They sit and wait. Buyers had a lot more incentive to act with falling mortgage rates to record levels but mortgage underwriting grew tighter over the year as well.
The extension of the low interest rate policy by the Fed through the end of 2014 has obliterated any sense of urgency by sellers. I am getting a lot of feedback from real estate professionals about this as well as seeing it within my own appraisal practice. There is a lot going on the world right now and the action by the Fed suggested that they weren’t particularly encouraged by the economy. To many this may seem as an incentive for sellers to get going and sell. But many of those sellers have to buy.
The drop in inventory as a phenomenon may or may not pass quickly but one thing is clear – weird changes in market behavior happen for a reason – I don’t see declining inventory as a particular sign of strength in the housing market.
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Coming from the NAR as they do, the more likely explanation is that the numbers are just plain wrong . . .
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I disagree with Jonathan Miller, I think declining housing inventory is a good sign and it will help house pricing rebounce from their historic low value. That means some seller could sell their homes instead of going through short sale or through foreclosure.There are a lot of seller upside down only 10%-20% of current market. There ara also a lot of home owners letting their homes go to short sale or foreclosed basically cause they are upside down not because they can`t effort. I think if they realize there are limited properties for sale and house prices going back up they will be current and keep their properties. What Happen to Supply & Demand? Kind Regards
Erkan,
The question asked and answered is whether the decline is good or bad.
Jonathan examined and reported the supply/demand for us and it just isn’t as simple and straight forward as you imply.
Read Jonathan’s analysis again, “New scenario: Declining Listing Inventory = fall in seller confidence and the sharp decline in distressed inventory entering the market.” You have to look deeper into what consitutues the supply and the demand you are analyzing.
We are still cleaning up a mess where overstiumulated demand masqueraded as “under supply.” Let’s not let that fool us again so soon.
[...] Jonathan Miller (author of Matrix Blog) wrote on Monday – “The Decline In Inventory Right Now is NOT a Good Sign.” Jonathan and I disagree on this point, which we delightfully and civilly discussed via [...]
[...] The Decline In Inventory Right Now is NOT a Good Sign [...]
[...] higher prices, which would be welcome in many quarters. However, two weeks ago Jonathan Miller of Miller Samuel Inc. questioned whether the trend was a good thing. “The drop in inventory as a phenomenon may or [...]
[...] higher prices, which would be welcome in many quarters. However, two weeks ago Jonathan Miller of Miller Samuel Inc. questioned whether the trend was a good thing. “The drop in inventory as a phenomenon may or [...]