US Housing Inventory Shrinks

Insatiable investor demand, low prices and lower interest rates have done well to sap the U.S. housing market inventory. The Department of Numbers’ Housing Tracker reports inventory fell …

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Insatiable investor demand, low prices and lower interest rates have done well to sap the U.S. housing market inventory. The Department of Numbers’ Housing Tracker reports inventory fell 23% for the year ending in February and analysts at Trulia are calling it an “inventory spiral” that will likely be even worse by this time next year. Experts say the pace of the inventory decline is slowing, but higher prices will cause more sellers to wait for the possibility of getting even more, which will apply persistent downward pressure on inventory. For more on this continue reading the following article from TheStreet.

The housing market is currently trapped in an "inventory spiral" that is unlikely to snap for at least another year, according to Jed Kolko, chief economist of online real estate company Trulia.

"Housing inventory is scarce across the country and will probably be even tighter this time next year," said Kolko, in a report Tuesday. "However, inventory is declining more slowly now than it did a year ago, when prices bottomed."

Housing prices found a floor in February 2012 and have been on the rise as strong investor demand and a decline in foreclosure sales has helped shrink years of excess supply.

Housing inventory nationwide declined 23% year-on-year in February, according to the Department of Numbers’ Housing Tracker . Inventory fell year-on-year in all 50 of the largest metros and was down more than 50% in several California metros.

The steep decline in supply has resulted in price increases of 10% or more in metros such as Sacramento, San Jose and Seattle.

More recently, the pace of inventory decline has shown signs of slowing down. 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.

Still, there is a shortage of inventory in the housing market. At the current sales pace, it would take only a little more than 4 months to clear all the inventory in the housing market.

This shortage bodes well for home prices, but it is not good news for buyers who are slowly returning to the housing market only to discover they have few good choices.

It appears this shortage might persist for a while, according to Kolko.

"Everyone wants to buy at the bottom; no one wants to sell at the bottom," the economist notes in his report. "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."

So while less inventory led to higher prices in the early part of the recovery, higher prices are now causing a shortage of inventory. This is the "inventory spiral" Kolko is talking about.

But eventually rising prices will encourage homeowners to sell and builders to build, which will add to inventory and break the spiral.

So the important question is when will inventory bottom?

Kolko looked at the monthly change in inventory before and after local prices bottomed in the metros with the largest price gains such as Phoenix, Las Vegas and Oakland, CA.

It appears supply of homes declined the most in the first 6 months after local home prices bottomed, with inventory falling by more than 2% on an average.

Inventory tends to decline less sharply a year after prices bottom, but in markets such as Phoenix and Miami, Kolko notes, prices have been rising for more than 18 months and yet inventory continues to decline.

"It could be at least another year until national inventory starts expanding," Kolko writes in his report. "Of course, inventory will probably turn up this spring and summer because of the regular seasonal pattern, but the underlying trend will be less inventory than is typical for each season, not more."

The question of when inventory will turn around 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," he wrote.

For now, prices continue to edge higher.

In February, asking prices rose 1.4% month-over-month, seasonally adjusted – the highest monthly gain since the home price recovery began, according to Trulia’s Price Monitor. Year-over-year, asking prices rose 7.0% and were up in 90 of the 100 largest metros, with the biggest gains in Phoenix, Las Vegas, and Oakland.

Asking prices lead sales prices by two months and serves as an early indicator of trends in homes prices.

This article was republished with permission from TheStreet.

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