Wednesday, January 28, 2009

Positive News in Housing Inventories

I have been maintaining for a long time (particularly in the subscriber newsletter), that the key to the bottoming process in the economy is housing and the key to housing prices is inventory.

While housing prices continue to fall, yesterday was the first glimpse of hope on the inventory front in a long time. In the graphic below, I have captured the months of supply of housing inventory since 1963. Note that the December data show the biggest drop in housing inventories in 28 years.

Before anyone gets too excited about this development, however, a couple of caveats are in order. Considering that months of supply is a function of total inventory and the transaction rate, there are several moving parts in these calculations. The fact that housing inventory is still at levels comparable to what was seen in early 2004 means that in absolute terms, there is still a room for considerable improvement before the inventory issue is addressed. Further, in some parts of the country the majority of the transactions are related to foreclosure activity. Given the high elasticity of foreclosure sales, this component of the transaction rate has to be taken with a very large grain of salt.

The economy has likely not yet reached a bottom, but there are encouraging signs. If housing inventory continues to fall and cash starts departing money market funds in search of better returns, then it is possible to at least entertain the possibility that equities have turned the corner.

[source: Census Bureau, VIX and More]

9 comments:

Anonymous said...

The Vix cash index traded below forty this morning for the first time since the stock market rally of January second to sixth. The Vix cash index has not traded below forty for any considerable period of time since September 2008

Anonymous said...

what i found recently that EURO is related to market if EURO up. market will be up. not clear relation, but recently market up. UERO up too. besides VIX down

Anonymous said...

i read your blog often and find it to be among the best for quality information.

that said, please don't tell me you believe that the reduction in inventories for housing is the beginning of a trend.

remember this is winter, and people don't even bother to list their homes in winter even in a good market.

add to that the fact everyone is waiting for the government to save the day and of course there will be a huge quantity of "unlisted" inventory being held for the supposed increase in prices.

the housing mess is far far far from turning the corner, and that inventory data (if it's even accurate as all industry data from the housing industry is highly suspect) is just another misleading step on the slope to the housing bottom which is far far below where we are now.

again, love your blog, but this time you got it very very wrong.

Anonymous said...

"again, love your blog, but this time you got it very very wrong."


I agree.

Not even taking into account shadow inventory could lead to disaster for the remaining investors that still have the will to purchase.

The Premium Collector said...

The news in housing was definitely positive. At this point in the game any positive news out of housing is very welcome.

Anonymous said...

Don't forget that California law SB1137, which was enacted on Sept 5, 2008, placed a 60-day moratorium on Notice-of-Defaults and Notice-of-Trustee Sales. That means foreclosures have been artificially delayed by 60 days -- now that those 60 days have elapsed we will see California foreclosures return. And THAT will cause a big increase in housing inventories in the coming months.

valeriobrl said...

We are in a Bear Market..but.."don't fall in love with the downside!".
http://www.flickr.com/photos/valeriobr/3236422706/sizes/o/

Eric said...

news today is that sales are at an all time low. so even though inventories are falling, sales are falling faster.

http://www.marketwatch.com/news/story/December-new-home-sales-plummet/story.aspx?guid=%7B3DC685F7%2DB6AF%2D4702%2D96B3%2DBFC42CA0AC4C%7D

Bill Luby said...

I'm glad to see this post generated a fair bit of interest.

Some quick points:

1) the data I cited is seasonally adjusted.

2) regarding "the beginning of a trend" with respect to housing inventory, today's different data set suggests otherwise and I think my caveats indicate that I was/am skeptical. Still, I want to keep an open mind and see what the January data look like.

3) thanks for reminding me of SB1137 and more generally that various legislative acts will likely stretch out the foreclosure process and leave trails of lumpy data along the way

Cheers,

-Bill

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