Sunday, December 28, 2008

Housing Inventories Tell The Tale

While current home sales are a product of current prices and consumer confidence, in order to see where the future of housing is going, it's useful to look at home inventories. Here's a look at US home inventories in November over the last decade and a half:

We can see from the chart that the housing boom which preceded this bust may have been caused in part (alongside low interest rates) by low inventory levels. This caused prices on new homes to be bid up, resulting in a building boom (to capitalize on large profits) which pushed inventories up to abnormal levels.

Eventually, slowing demand led to a glut of new homes on the market, leaving a supply/demand imbalance that deflated the home construction industry. In the last couple of years, we see that much of this inventory has been worked through, but not without a lot of pain. Builders have had to slash prices and have abruptly cut new construction, which has hurt the economy.

We now see that housing inventories are currently at levels which appear to be 'normal', at least by historical standards; that's the good news. The bad news is that confidence is at such low levels that inventories will likely have to drop to abnormal levels before prices stabilize. What level is that exactly? Nobody knows. But as new home sales continue to outpace new construction, this inventory level will continue to fall, and prices will once again be bid up when this happens.


Anonymous said...

Inventories are normally stated in months sales, NOT in an absolute number. The absolute number is meaningless unless it is viewed in terms of the sales figures.

Love the book summaries BTW, helping me "catch up" on the list.

Saj Karsan said...

Hi Anon,

While you are right that these numbers are usually stated in months sales, I disagree that the absolute number is meaningless. Monthly sales will fluctuate greatly based on consumer confidence, so while months sales is good if you're thinking short term and assuming no change in months sales, for a good long-term historical perspective the absolute number is the more useful.

Anonymous said...

From the chart it looks like there is at least 2 years to go till it reach a level that is "normal".

hcv said...

I agree with Saj. I never really understood why they were displayed in months. consumer confidence can change on a dime making the metric useless.