Tuesday, December 11, 2007

The Month's Supply Measure Keeps Rising

The NAR Existing Home Sales report came out yesterday, with one not-terrible number (pending sales seem to have flattened) and one bad one (the months of inventory available for sale continues to rise).

The official line of NAR is that New Home Sales will fall next year, while Existing Home Sales will turn around. I am doubtful on both the relative and absolute picture for existing home sales. Builders, who are usually high leveraged, need to get rid of houses, and are willing to slash prices to do so. As Genesove and Mayer showed in a terrific paper on nominal loss aversion, homeowners seem to have a strong distaste for selling at a loss. Second, while NAR asserts that the mortgage market is improving, I don't really see it. Spreads on jumbos had narrowed some, but the subprime market seems to be gone for the time being. The fact that inventories continue to rise relative to sales also makes it hard to foresee a turnaround. And in certain regions of the country (the inland empire of California), foreclosures will make things even worse.

If I were NAR, I would be advising their members to advise their sellers to expect to take a price cut; until that happens, inventory will continue to be a drag on the market. Then again, turning points are tough to call, and I could be all wet. But I don't think so.

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