Keeping It To 1000 Words ...
We like the chart below a lot. It tells the current story of housing succinctly in a way that everyone can easily understand. The x-axis shows inventory of homes for sale in millions of units monthly back to 2001. The y-axis is the pending home sales index reading. The bubble size shows the next twelve months home price change based on those levels of supply and demand. Not surprisingly, high demand coupled with low inventory produces big blue bubbles (strong home price appreciation), while the opposite produces big white bubbles (strong home price depreciation).
The obvious takeaway is that we're currently in a very favorable dynamic for prices, as shown in the orange circle. The orange circle shows current inventory and volume, but for bubble size, we've used LTM (as opposed to NTM) price change, which was +9.7% through February 2013 according to Corelogic. Note that the orange bubble is smaller than most of the other bubbles in the same area, suggesting price appreciation may accelerate from here.
Another takeaway is the inverse relationship between supply and demand. Inventories are negatively correlated with demand, which might seem at odds with recent commentary in the market about how low inventories are holding back transaction volume growth. Consider the range of volume that has accompanied the current level of supply historically. It's produced a volume range on the pending home sales index of 96 to 131. Currently we're near the low end of the range at 105. In other words, we've seen sales activity levels as much as 25% higher than they are today based on the same level of inventory, so we don't buy the NAR argument that it's inventory holding back volume. That said, there are likely other factors such as more stringent underwriting, which we consider a good thing.
Joshua Steiner, CFA
