Housing is up Inventory dropping to 4.2 month supply following the steady, gradual drop in inventory seen through the end of 2012. Low inventory signals a solid shift from a buyer’s market, where the supply exceeds the demand, to a seller’s market, with a low supply and higher demand. This is a factor that can help drive home values back up. Still, this is not entirely good news. Let’s look at the some of the factors in the market that are causing the recent drop in inventory.
Inventory in the housing market is frequently calculated as a factor of demand. The 4.2 month supply is the predicted amount of time it would take to sell the current amount of homes on the market at the current rate of demand. Months-of-supply are partially seasonally adjusted because they use the seasonally adjusted sales rates with the absolute number of homes for sale. This means that an increase in demand can decrease supply just as much as a decrease in available homes. When both occur, we see supplies drop as they have. The seasonal adjustment factor attempts to eliminate normal seasonal fluctuations in sales patterns (such as winter low activity and the increases of late summer) so that months can be compared in absolute terms.
Numerical inventory starts with the amount of houses there are available to be sold. All of the homes for sale at any given moment make up the inventory. The number of homes for sale help market analysts gauge the strength of the housing market, as the base for calculating the speed and value homes are selling at. This can get tricky in itself because at any given time there are many homes waiting to be available to be sold. These homes make up the shadow inventory; typically homes undergoing foreclosure or homes being ‘held’ for the right moment.
The weight of foreclosures was a massive drag on the market for years, but as the backlog slowly eases, experts report that the crisis is over. States with drawn-out and complicated foreclosures and large backlogs are impeding price recovery, because of the perception of the looming shadow inventory that could hit the market at any time. States with faster foreclosure processes have a far smaller shadow inventory and are seeing greater price improvement on homes across the board. Part of the problem was getting investors to buy foreclosures, but as investors see long-term improvements and rentals are strong, more foreclosures are being bought cheap and renovated for future rental or resale. Banks meanwhile are finally getting the hang of their rampant foreclosure issues. Still, many banks are still holding an impressive shadow inventory, and that will take time to normalize.
The other half of the shadow inventory are regular homeowners. Many homeowners, especially those driven underwater when the market crashed, are waiting for home prices to rebound further before selling. It makes sense: if waiting longer could decrease your loss, bring you back “above water,’ or even get you a profit on your home, wouldn’t you wait as long as possible? Zillow has reported that over 2 million underwater homeowners have “surfaced” and no longer owe more than their home is valued. Another million is predicted to join them through 2013. These homeowners are more likely to step out of the shadows in the coming months.
Speculations predict that housing inventory will remain low through 2013, slowly finding equilibrium between increasing demand, rising home values, and an easing shadow inventory on the way back to a healthy housing market.
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About Geoff Thompson — Geoff Thompson is an Owner and Founding Partner of Colibri Real Estate, LLC. which operates online education providers Colibri Real Estate, Insurance License Express and License Tutor. Follow him on Twitter.