A Home prices versus inventory comparison

[deejayoh]

I was interested in how inventory changes drive price changes across markets. My hypothesis was, as inventory grew, prices would start to go down. So I ran a scatterplot of home inventory change vs. price change for the markets tracked by Case Shiller. The results were interesting and counter intuitive - at least at first



What you see is pricing is POSITIVELY correlated with inventory. In other words, the markets with the greatest increase in inventory (which happen to be Seattle and Portland) have the best performance on price. The model isn't great, but there is definitely a relationship

Why would this be? At first it seemed wrong to me. More inventory should drive lower price. But when I thought about it, it makes sense. Inventory is building because sellers haven't started to lower their prices. The market hasn't gotten real yet. In markets where the price has started to drop, inventory seems to have steadied.

My read on this is that unless inventory gets sopped up by a great buying binge, Portland and Seattle are in for a bumpy ride.

Note that Charlotte is the one C/S market I left out of the analysis - as it is not included at housingtracker.net so I did not have inventory data. if someone can supply, I will add to the chart

D

[TJ_98370]

Interesting graph. Inventories increase because people are not buying because prices are too high. The logic is almost intuitive.

[meshugy]

Hi DJ...that's an interesting theory. However, measuring increase in inventory alone doesn't tell us that much. You need to take a look and see what is historically high inventory for a given area. Right now Seattle is at historical lows for inventory, just as Crellin mentioned in the PI.

Crellin also noted that, while inventory has increased in recent months, compared with the same months last year, it is not high by historic standards.

So higher inventory from record lows doesn't tell us much. We need to determine a what point inventory exceeds demand. History tells us that that slowdowns in the 80s and 90s had over double the inventory we have now. So we still have a long, long way to go.

[deejayoh]

[meshugy]

[mike2]

[deejayoh]

[george]

[mike2]

[deejayoh]

[TJ_98370]

george

Glenn Crellin is the director of the Washington Center for Real Estate Research at Washington State University. I would say that he is reasonably objective. I can't find any obvious ties to where his livlihood is dependent on the health of the real estate industry. His views are a bit more bullish than mine though.

Here he is commenting on affordability of homes, referencing the Housing Affordability Index which states that the typical "middle income" family in King County has only 70% of the required income to qualify for a mortgage on a "mid-price" home.


"...Home prices only tell part of the story," Crellin said. "The real question regarding housing's future strength is whether households can afford the homes." The Housing Affordability Index, which uses median home prices, mortgage interest rates and family incomes as inputs, measures the degree to which a middle-income family can afford the mortgage payments on a typical home. The statewide index, after declining each quarter since late 2003, finally inched up in the fourth quarter to 87.0. This means the typical family had only 87 percent of the income required to qualify for a mortgage on a mid-price home. Individual county indexes were often well above or below this guideline, ranging from a very encouraging 193.9 in Adams County to a highly unaffordable 39.3 in San Juan County. Among urban areas, the most affordable was Benton County (Kennewick/Richland) at 180.9 while King County surprised no one with the least affordable measure (69.6)....

[GetMeTheHellOutOfCA]

The correlation between price and volume is counter intuitive and indicates that some other process is driving this behavior.

One interesting dynamic I have noticed about Seattle market is that the vast majority of Seattle housing inventory is over priced and of low quality. These homes typically languish on the market for months. Quality homes that are appropriately priced move immediately or withing 10 days. These homes are generally in short supply and are priced at a premium to reflect their quality relative to the garbage box houses on the market. This behavior would account for the situation where prices increase despite increasing volume. I have seen this behavior for a while now as I have seen a number of homes snatched away before I could even make an offer. Yes, I am one of those nasty Californians looking to snap up a piece of Seattle.

At this moment, Seattle is truly different to the rest of the USA (with exception of Portland). How long this lasts is another question...

[deejayoh]

[Puget Sounder]

[GetMeTheHellOutOfCA]

Yes but then I would be living in Colorado or Texas. I'm a west coast guy and if it's not San FRancisco, it will have to be Seattle. Seattle is special you know.

You know, you could snap up a larger piece of Denver, or a really big piece of Austin.