You know, I think we might be missing the point with these sales numbers. Yesterday, the National Association of Realtors (NAR) released their February sales numbers showing another drop. Sales of existing homes declined 0.6 percent nationally, including a 1.4 percent seasonal decline in single-family home sales, compared with gains in condo sales.
Some analysts are blaming the bad weather experienced around the country for the low sales numbers, though seasonal adjustments are suppose to deal with that. Other analysts are saying the numbers were better than expected, as if bad numbers that aren't as bad as mistaken predictions are some how no longer bad. In any case, I think the focus on these numbers—as was generally the case with the talking heads and those in Congress—is missing out on the bigger number reported yesterday.
Buried down at the fifth paragraph of the NAR press release (under the odd rock and roll video they posted on their website) was this data:
Total housing inventory at the end of February rose 9.5 percent to 3.59 million existing homes available for sale, which represents an 8.6-month supply at the current sales pace, up from a 7.8-month supply in January. Raw unsold inventory is 5.5 percent below a year ago.
Digging in a bit to the data over the past year, NAR is reporting that the national housing inventory is at its highest level since September. This is interesting for two reasons: first, inventories had downward pressure on them by the 1.4 million people who applied for first-time homebuyer tax credits in the third quarter of 2009. Second, the first-time homebuyer credit has been extended through April 30, yet the "months supply" of housing measurement has grown this year, up from 7.8 months of supply in January to 8.6 months.
This growth in the inventory is part of a trend. As the below chart depicts, inventory has expanded rapidly since the top of the housing bubble in 2005.
The scary thing is that this data does not include homes in the shadow inventory, which could potentially double this inventory chart with millions of homes sitting in the final stage of foreclosure without banks acting on them (either because they haven't gotten around to it or are trying to avoid losses—financial and political).
The reason that this inventory figure is so significant is that it implies the long-term prospects for recovery in the housing market are dire. Even if prices rise in the short-term, they will have consistent downward pressure on them by this massive supply of existing homes. The more supply there is, the lower prices will be. The lower prices are, the more underwater homeowners will struggle.
Since at this point credit conditions are likely only to get tighter—either because an increase in the federal funds rate at the end of the year and/or because of more restrictive capital requirements for banks causing them to hold more cash in reserve. That doesn't bode well for the price of mortgages, which are probably going to trend upward at least a bit through 2010, decreasing demand. Eventually prices will drop enough that buyers will demand housing units at those depressed prices and the market will begin a more stable recovery, but that may not be for a couple years.