Nationally, housing inventory fell 23% year-over-year in February, this according to the Department of Numbers HousingTracker. Inventory fell year-over-year in all 50-plus markets they track, and by more than 50% in several California metros. Price increases and disappearing inventory go hand-in-hand: nearly all metros with the biggest inventory declines also had year-over-year price increases of 10% or more (including Sacramento, San Jose, and Seattle).
Inventory and prices affect each other in three ways:
- Less inventory leads to higher prices. That’s because buyers are competing for a limited number of homes for sale.
- Higher prices lead to less inventory – at least in the short term. Everyone wants to buy at the bottom; no one wants to sell at the bottom. When prices start to rise, buyers get impatient while many would-be sellers want to hold out in the hopes of selling later at a higher price.
- Higher prices lead to more inventory – in the long term. As prices keep rising, more homeowners decide it’s worthwhile to sell, especially those who get back above water, which adds to inventory. Also, builders take rising prices as a cue to rev up construction activity, which also adds to inventory.
In the short term, the first two reasons create an “inventory spiral”: less inventory leads to higher prices, which leads to less inventory, and so on. But the inventory spiral can’t go on forever because eventually rising prices will encourage homeowners to sell and builders to build, which add to inventory and breaks the spiral. The critical question for the housing market – especially for buyers fighting over tight inventories – is how long until that kicks in? How long do prices have to rise before sellers and builders start adding to inventory?
When Will Inventory Turn Around?
Nationally, housing inventory is no longer in a free fall. The seasonally adjusted quarter-over-quarter change in inventory is negative, but no longer falling as sharply as it did a few months ago. (Year-over-year changes are slower to show a turnaround because they combine a full year’s worth of changes in a single measure. But looking at quarterly or monthly changes requires a seasonal adjustment because inventory has a strong seasonal pattern that makes the underlying trend hard to see.) The quarter-over-quarter decline in inventory has been at a 14-21% annualized rate since October 2012, compared with a 23-29% annualized rate from March 2012 to September 2012:
In other words, the inventory decline was sharpest just after national prices bottomed in February 2012. But by the fall of 2012, after several months of price increases, the inventory decline slowed this as national price gains accelerated.
How long until inventory turns positive, rather than becoming just less negative? Although prices bottomed nationally 12 months ago, all real estate is local and different metros hit their price bottoms at different times just as inventories will turn positive at different times in different markets. That said, the longer prices rise, the less inventory declines. That’s because higher prices eventually encourage more homeowners to sell and builders to build. The effect seems to kick in after the first twelve months of price increases, when the market starts to break out of the inventory spiral, and inventory declines less sharply.
It could be at least another year until national inventory starts expanding. While new inventory has turned up this spring and likely will this summer because of the regular seasonal pattern, the underlying trend will be less inventory than is typical for each season, not more. The experience of metros where prices bottomed earliest suggests that inventory continues to decline even after 2 years of price increases. It also means that inventory should turn around first in metros where prices bottomed first, such as Phoenix, Miami, and Detroit, and later in metros where prices bottomed more recently, such as right here in Columbus, Ohio. Still, inventory is no longer in free-fall nationally: quarter-over-quarter inventory declines are milder now than they were in the months just after prices bottomed 1 year ago. Ultimately, the inventory turnaround will depend not only on how fast prices are rising, but also on whether prices will have been rising for long enough to encourage homeowners to sell and builders to build.
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