Tuesday, January 31, 2006

Inventory as a predictor for price changes

The seemingly random assertion that 7.5-8.5 months inventory represents a "balanced" market in MA got me thinking - that figure must come from somewhere, right?

Let's take a look back at market history over the last 14 years. Plotted below are two sets of numbers: the annual "months inventory" as reported by the MAR, and the annual appreciation rates (avg prices) for SFHs and condos. The "months inventory" represents how many months it would take to clear all the inventory of homes on the market. (2005 data are my estimates based on monthly/quarterly MAR reports; official numbers will be released in Feb).

Looks in general like appreciation rates and inventory are inversely correlated. Makes sense - if supply excedes demand, prices should drop, and vice versa. How tight is the correlation? You can see it most easily by plotting appreciation rate as a function of inventory:

Pretty cool. So what does a 7.5-8.5 month inventory predict for appreciation: loooks like around 4-7%. Fair enough, I guess that is what MAR expects in a balanced market. One of the interesting things about the plot - it emphasizes how infrequently the market has been in "balance" over the past few years.

So what's been going on with inventory recently? Here are the monthly reports for inventory from the past 3 years (calculated from MAR data). Clearly there are seasonal patterns, but the divergence from established trends is crystal clear beginning around July. If December is any indication, the divergence appears to be accelerating.

Even so, it may take some time for the continuing inventory build to put us in the predicted range for price declines (sustained 11+ months of inventory). Ofcourse, accelerating supply (here) and demographic trends (here) could speed up the process.


What else might accelerate any change in the market? Interest rates appear to be the wildcard.

Mortgage rates over the last 14 years were generally (though not smoothly) trending downward. This provided a tailwind to price appreciation through increasing affordability. It's no stretch to argue that if mortgage rates increase appreciably (and they already have for ARMS), the entire relationship of appreciation versus inventory will shift leftward. In other words, the inventory levels associated with price declines will drop, and the tailwind of lowering rates will be replaced by the headwinds of rising rates.

11 comments:

Pinch a Penny said...

I think those charts make great points. Added with the high number of foreclosures, the lagging job market, high energy prices, high taxes, and an outflow of residents, and I might be able to buy a decent house in the next couple of years.... If my job is not outsourced to india or china again!

cl said...

Great work with the graphs. Thank you! I've been tracking house sales pretty closely and I'd say for the last year and a half they have been gradually trending down. I don't know why it hasn't been reflected more in the median- maybe because it was mostly in the higer end homes at first. Now I'm seeing a lot of price reductions in the lowwer end as well. In one zip code I'm tracking in a Boston suburb there were less than 10 SF sales in January. With an average sales price of $375K, all sold for less than their original asking price with a range of -14K to -124K taken off the top. (avg. 14.8% price reduction)

That being said I noticed a big uptick in activity in January- lots of houses went under agreement for this time of year. Same thing happened last year, then it slowed down in March and April. Most of the houses that went under had deep price cuts from the fall. I think buyers have caught on to beating the Spring price increases by looking for "bargains" in January. It will be interesting to see what happens this year with the increase in inventory. I expect we may see a lot of unsold inventory coming back on in the next few months.

RealEstateCafe said...

More innovative analysis. Thanks.

My recollection from comments on a post several weeks ago is you'd be interested in participating in a series of informal real estate round tables with other bubble bloggers and their readers in Boston / Massachusetts.

For our part, The Real Estate Cafe is eager to:

1. Release the results of the survey we've conducted over that past three weeks. I think it's important to layer consumer expectations on top of market stats to get a more complete picture.

2. Share some data we've been collecting from the MLS which clearly documents softness in SF and MF sales above $500,000.

Wish there were a more direct way to make this request, but I can't find any email address on your blog. So, may I invite you and any interested readers to correspond with us if you are interested in the above? Contact information is on our blog at:

http://www.realestatecafe.blogs.com

answer-man said...

ps I'm having a little trouble sending comments so if I do it twice please excuse me and I apologize.

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