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Wednesday, October 11, 2006

Let's Talk Inventory

With the number of homes for sale rapidly increasing the last few months, and the pivotal month of October now nearly halfway over, I think it is a good time to take somewhat of an in-depth look at inventory. I refer to October as "pivotal" because as far back as I have reliable data (2000), inventory has always decreased from September to October. If inventory increases this month, I believe we will have truly turned a corner.

Some of the local papers in the last few months have claimed that the Seattle area is becoming a "buyer's market." Personally, I think that's malarkey. I'm a potential buyer, and there's still no way I'd touch this market with a ten foot pole. It has been said by some commenters on this blog that in order to see any significant slowdown in price appreciation and a return to a "balanced market," the Seattle area would need to experience a two-to-three-fold increase in homes for sale. Let's take a look at some historical inventory data to see how that claim holds up, and to explore the following questions: What does a true buyer's market look like for the Seattle area? How soon will we at least experience a balanced market?

Unfortunately, I have been unable to obtain solid MLS data on inventory & sales any further back than the year 2000 (if anyone out there can help me on that, I'd love to hear from you). However, I was able to locate a number of data points back through 1993 via the Seattle Times archives. All of their reports from that time period give numbers from the "Puget Sound Multiple Listing Service," which includes all of King, Snohomish, and "North Pierce" counties. When I refer to record highs below, the time period under consideration is from 1993 to the present. For the purposes of comparing current (post-2000) data to these historical figures, I'll be assuming that 75% of listings and sales in Pierce county take place in "North Pierce." With that introduction, here are some of the interesting data points I found.

Record High Inventory (pre-2000)

As well as I can tell, the record high inventory in the two-and-a-half county region was 17,292 homes in July 1996. (The Seattle P-I claims that the summer of 1994 had 23,000 homes on the market, but that figure is not corroborated by the Times—which put the number at 14,000-15,000,—and is so far outside of every other number I can locate, that I believe it to be a typo.) That month saw 3,315 pending sales, making the Months of Supply (MOS) 5.22, while YOY appreciation stood at 5.1%. For the most part, it looks like that was a fairly "balanced" market.

Record High Inventory (post-2000)

The all-time (since 1993) record high inventory appears to have been in the summer of 2003, just as housing mania was really taking hold in Seattle. Specifically, June 2003 had 20,807 homes for sale in King, Snohomish, and North Pierce counties. While the number of homes on the market was quite high, so was the number of pending sales: 6,396. The MOS for June stood at 3.25, and appreciation hovered around 3-5%. I'd call that a seller-friendly market.

Record High Months of Supply & Record Low Pending Sales

Going back a bit further we find that late 1994 to early 1995 had an even more balanced market than 1996, possibly even tipping slightly in the buyers' favor. MOS exceeded 6.0 from October '94 through March '95, while YOY appreciation was 3-4%. The record high MOS was 6.89 in December 1994, a month that also saw the record low pending sales of just 1,726.

Current Situation

So where do we stand currently? Last month there were 19,173 properties for sale in King, Snohomish, and North Pierce counties. Note that this is very near to the record high inventory of 2003, while the 5,530 pending sales are slightly fewer than June 2003. September's MOS comes in at 3.47. A year ago, the 2.5-county region had an MOS of just 2.13.

The Future?

If September's YOY trends (+36% listings, -17% pending sales) carry through to 2007, next September we will be looking at approximately 25,994 properties for sale, 4,595 pending sales, and 5.67 MOS. Of course, no one really knows whether the current trends will continue. Looking at the trend of the last few months' YOY numbers, it would be fairly easy to make the case that inventory will increase even faster, while pending sales decline faster.

YOY % Change
King County SFH only

So does inventory need to double for Seattle to be a balanced market? No. Even if sales held steady where they are (not likely), we would only need approximately 70% more inventory to reach a balanced market. Personally, I think we are likely to see the elusive 6.0 MOS balanced market as early as next spring, and no later than next winter. Will it stop there? What will happen if the greater Seattle area sees 8.0, 9.0, 10.0 or even higher MOS? I think it's possible, and based on the historical data, I think it could push "appreciation" into negative territory.

Your thoughts, corrections, and analysis are welcomed.


Matt Rivett said...

Nice post Tim, I've always been a believer in numbers, trend analysis correlation prediction, etctera... none of this "Well boomers are moving into the city" nonesense we hear regarding causes for sellers/buyers trends...

I'd say, yes, it looks like the buyers markets of the mid 90's was a true benchmark. But one thing that's impossible to measure, which I call the "Shiller quotient" is the psychology of the 'mania'.

If psychology turns against this market, like it has been in the past months, nationwide. We could be seeing a panic-scenario not seen in previous markets. I'm sure during the tech-stock slide of 01' there were a few 'diamonds in the rough' kick-ass stocks that happened to have .com at the end of their corporate title with working business models and a potential for profit. But psychology doomed all that.

Once people get it in their head Real Estate is a boat anchor and 'toxic' ala 'toxic loans' etcetera... it will turn a corner and act as an accelerator to an already listing market.

Again, nice work Tim

seattle_slow said...

Nice work Tim. Too bad you can't get the data from the late 80's and on. That's when the last Seattle RE bubble happened. I experienced it firsthand, and let me tell you, for those folks that bought in late '89 and early '90, they were underwater for years.

Comparing today's stats to those stats would be very interesting. Remember that 1990-91 brought a recession with the downturn, just as a number of pundits are suggesting that 2007 will bring. The difference is that there is so much more leverage that has occured with the current boom than the last one.
Folks are about to be crushed and they don't even see it coming.


Kaleetan said...

Seattle is at the top of the list for biggest jumps in inventory.

6.4% in Seattle

flopfolder said...

Nice post Tim. Good to get a bit more on track...

Increasing inventory can/will play a big part in determining the near-term future of the Seattle market. However, a rise in inventory isn't the only thing necessary to precipitate a fall in prices. If buyer sentiment decreases due to physcological forces, then sales number could quickly plummet. So, even without an increase in inventory, one could easily imagine a scenario where the MOS jumps up quickly.

This is why the term Months of Supply is kind of a misnomer as the metric is really a measure of supply/demand.

If the market turns negative, the same phsycological factors that added steam to the run-up will add to the nose-dive. That is, the emotional decision making. Just as everyone wanted to quick rich quick, everyone will want to avoid "catching the falling knife."

Just look at what has happened in some of the hot-spots around the country. Many have seen MOS increase from 2-3 months to 12-24 months over a very short period of time. This isn't due solely to new construction or every Joe Millionaire wannebe selling/flipping.

How far that momentum goes is anyone's guess, but it is the reason that prices often decline further than fundamentals support after a bubblicious run-up.

Regardless of what happens, this whole process will take years to happen due to the illiquidity of the market.

stephen said...

IMHO it's not going to happen on the over 6 month inventory numbers. Stats are great but different levels of the market work differently. This area has a huge number of 1960-80's houses that ran into the 400's because people got stupid for a couple of years. Those houses in the outer areas and west Seattle are falling to 350ish now and many hovering around 300k.

It's that very large middle/low end of the market that will tick along just fine as those houses get below 300k. With the current interest rate that's the magic payment for those who have to put 2 incomes together to get into six figures, and the 100k twenty-somethings posters aside, that's the bulk of the folks in this area.

One way this may play out is that the houses will sell as they drop to about 2001-2002 levels. IF Interest rates remain low and nothing major happens. The low interest rate increased the amount that folks could pay a month and exotic loans and panic pushed it beyond that but people still want houses they just have truly been priced out except for the stupid loans.

I know many of you here think anybody that buys a house right now is stupid but starting in the eary spring and the following year may very well be the right time to buy in this market.

flopfolder said...

Also, the fact that these things frequently take so long to unwind is the major reason why I don't see a lot of the most dire predictions out there coming true.

Many point to '98-'99 as the last years where housing was priced somewhat sensibly. If a house cost $200k in '98 then by the time 2009-2010 rolls around and we are nearing a bottom, inflation will make that same house cost $320k. There is no "real" appreciation as the increase is all inflationary.

So, if that 200k house now costs 400k, which would have been a 9% YOY appreciation from '98-'06, we only need to see a 20% drop nominal drop in prices over the next 4 years to get everything back on track.

I think such a possibility is easily within the realm of possibility.

Surkanstance said...

It's interesting how the statistics and personal observations don't always match up. I've been tracking listings for my zip (in East Bellevue) for about a year, and although the number of listings is WAY up from early this year (just over 40 in April) we have been hovering in the low 80s for weeks now. However, anecdotally I have been seeing lots of for-sale signs in my neck of the woods. I wrote on an earlier thread about the huge number of for sale signs I saw behind the Crossroads mall this week.

By the way, early this week we had some wild fluctuations on ziprealty. We dropped from 86 listings down to 75, and now we are back up over 80. I can't recall seeing that kind of day-to-day fluctuation on ziprealty in this last year.

Oddleif said...

My gut has been telling me Spring of '08 is the bottom, but I think that has more to do with my own bias than anything...

Would an idex combining a few, or many, of the metrics related and specific to RE be useful. For instance, working in the ratio to median income to median price and others into the MOS. Could that be useful in giving a superficial analysis of many different leverages on the market?

SourMash said...

Yay, some numbers! Thanks for something worthwhile to chew on.

Is this analysis single-family homes only, or SFH+condo?

Seems like condo build-out and conversion is a significant differentiator between mid-90s and today. I'd guess that inventory will go higher this time around.

Nolaguy said...

Stephen said:

With the current interest rate, that's the magic payment for those who have to put 2 incomes together to get into six figures, and the 100k twenty-somethings posters aside, that's the bulk of the folks in this area.

I completely agree.

Interests rates are just as big of a factor in home prices as inventory.

When a household with a combined income of 100k can get a mortgage for a $400k house, most will do it.

I'm more an more convinced that this whole phenomenon is a credit bubble.

The Tim said...

Is this analysis single-family homes only, or SFH+condo?

Except for the table at the end, all the numbers above are for SFH + Condo for King, Snohomish, and N. Pierce. I used this as the metric since that's the only data I have available pre-2000. Personally I'm most interested in the King County SFH market.

Anonymous said...

One way this may play out is that the houses will sell as they drop to about 2001-2002 levels. IF Interest rates remain low and nothing major happens. The low interest rate increased the amount that folks could pay a month and exotic loans and panic pushed it beyond that but people still want houses they just have truly been priced out except for the stupid loans.

I've thought somewhat along these lines too. The only problem is that a) interest rates will have to rise - bond traders can't force them low forever and b) toxic loans will eventually go away, either by mass foreclosures or government regulation.

So, $300k houses may still be out of reach for $100k households if 20% down payments and 25-30 year coventional mortgages become the norm. If people are underwater in their current homes, they won't have $60k to put down. And how many people do you know with $60k in cash laying around? Not too many, I'd wager.

There's a lot that could happen in the next few years. I think it's going to be tough to predict exactly what's going to happen. For myself, I've got my savings and when I can get a house I want in the neighborhood I want with the downpayment I've got for a conventional mortgage - I'll pull the trigger. Until then, I'm happy to keep renting.

Eleua said...

I think Peter Taylor has just answered the Trillion Dollar Question.

There is NO WAY that, absent an active equity escalator, people have the necessary 20%+ down payment to afford homes at even half their current price - especially in an environment of rising interest rates.


At the end of the day, houses will be worth what people can afford.

Most people have to HELOC or defer payments on their plasma TV. Just how are they going to magically come up with $40K-$100K for the down payment on a home?

IF YOU DO HAVE that kind of money, just think about just how many sellers will line up to kiss your butt to buy their home.

Eleua said...


Inflation does not necessarily mean that homes go up in price.

Inflation in WAGES/SALARIES will drive home prices up, provided other necessities track at, or below that rate.

If there is inflation, but your wages are stagnant (thank you, globalism), you have the same amount of money, but more of that money has to go for food, energy, medicine, and other basics.

This puts a DOWNWARD pressure on homes - especially as interest rates rise to combat inflation.

It is very possible that inflation will actually hurt home prices.

The past few years has seen commodities rise in cost, while incomes stagnated. This is counter to the trend that followed WW2.

Yes, it is different this time.

Anonymous said...

>I'm more an more convinced that this whole phenomenon is a credit bubble.

Fantastic article about the history of how Credit booms are always followed by period of bust/depression.

"An increase in the quantity of money or fiduciary media is an indispensable condition of the emergence of a boom. The recurrence of boom periods, followed by periods of depression, is the unavoidable outcome of repeated attempts to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

flopfolder said...

Yes, yes Eleue this is certainly true. My model was overly simplistic. There are quite a number of factors that will influence housing prices (or those of any material good):

Inventory: As mentioned earlier, inventory is directly associated with supply. As inventory increases a downward pressure on prices is exerted. Inventory in this case would include new construction, the resale market, conversions, etc.

Interest Rates: As interest rates rise, debt service becomes costlier, thereby decreasing demand and exerting a downward pressure on prices.

Wage Inflation: Works just the opposite as interest rates and increases demand, exerting an upwards pressure on home prices.

Nonwage Inflation: As Eleue mentioned, inflation in material goods and services decreases a consumer's pool of cash, thereby decreasing demand.

Comsumer Sentiment: A wildcard. In booming markets it tends to exert an upward pressure on prices. It can hasten the decline of a sagging market.

Eleue is quite correct about the effect of inflation. In fact, I made this same point in my one post in that long RCG name-calling thread. Affordability (as measured by median sq/ft price vs median income) is a great fundamental metric. I'm not sure what this looks like exactly for the Seattle area, but it wouldn't surprise me if it closely mirrors the national trend. That is, it has gotten totally wacky over the last 4-5 years.

So, the coolest graph ever would show the effect on inflation adjusted median sq ft home price vs MOS, vs. affordability and vs interest rates.

Such a model may go a long way to showing where fundamental prices "should" be and where they are now...

flopfolder said...

Sorry I misspelled your name Eleua.

Eleua said...

No problem.

In case anyone is wondering, Eleua is the name I adopted for my on-line persona.

It is Hawaiian (as I'm a big multi-culturalist), and the meaning goes like this:

Hawaii has a lot of rain. It is the wettest state in the nation, and is home to two of the three rainiest places on earth. Not surprisingly, the Hawaiians have 56 words for rain.

I grew up in the PNW, and Hawaii is my adopted home away from home (I lived there for almost 4 years). Rain is my favorite meteorological phenomena. I love the rain.

Well, given that I'm sort of a pessimist on this, and other forums, I wanted something to reflect that.

"Ua" is the root word for "rain in Hawaiian, and "Ele" is Hawaiian for black/darkness. Eleua means "the darkness of rain", or what we would call in English, "Blackcloud."

Kilinahe is my other persona (when I want to be an optimist), as that is translated to "refreshing, life giving rain." That's what I call Mrs. E.

Just a little boring trivia, lest anyone wonder where that name came from.

Shadowed said...

Mine comes from the fact I rent a house in Lake Hills. =)

S Crow said...

S-Crow comes from the fact my mother thinks we run a small unique bird business.

Seriously. So I ran with it.


redmondjp said...

Hmmm, where I live, and my nickname -- (sniff) I feel so, uncreative!

But enquiring minds wanna know, why is our bloggerator The Tim? First dibs?


flopfolder said...

flopfolder comes from another interest of mine... poker.

Basically, I am tight as hell, which just goes along with the whole not wanting to overpay for a house thing, I guess.

seattle_slow said...

seattle_slow comes from 4 things:

1. Seattle was slow to the bubble
2. Seattle sheeple-buyers are slow
3. Seattle's bubble will pop slowly
4. A play on words with Seattle Slew (the only undefeated triple crown winner).

stephen said...

I just went with stephen because it makes me say what when someone says it out loud :-)

Anonymous said...

synthetik23 - it's a manufactured, chemical, toxic world. i like synth music, and 23 is kind of a strange and fun number

biliruben said...

biliruben comes from being drunk while researching an the illness of a friend's infant way back when message boards started becoming popular in the late 90s. Notice the mispelling.

I thought I would only post once or twice. Boy was I wrong.