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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
MonthListingsSales
May-0610.20%-6.27%
Jun-0617.17%-10.14%
Jul-0619.29%-13.08%
Aug-0623.91%-13.29%
Sep-0628.79%-20.59%
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.

9 comments:

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

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.

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.

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.

NO WAY!

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...

Flopfolder,

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.

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. =)