Monday, July 21, 2008

Perhaps we can start looking for a bottom

I have long said that so long as the months supply of housing available for sale is rising, it is not possible to know then the housing market will reach bottom (in terms of price). But the months supply measure has fallen pretty substantially since this winter, from a peak of 11.4 months to a current rate of 9.4 months. The inventory needs to get down to 5-6 months before inflation adjusted prices become stable. But the derivative finally has the right sign.


Robert Dietz said...

Richard ---

Think maybe the NSA numbers provided by economagic may be giving different numbers.

May be wrong, but I think the last existing home NAR measure was 10.8 months. Last Census new home measure was 10.9. Below peak, but not much.

gaius marius said...

mr dietz, i think the series more often cited in this respect is the seasonally-adjusted version.

as to a bottom, i think its important to distinguish -- a bottom to what? a bottom in new starts may well be close at hand, i would concur, as those generally quickly follow inventory peaks. but the past examples i've studied of both smaller and regional housing busts indicate that the bottom in real prices -- which is i think what most people mean by 'the bottom' -- will follow seasonally-adjusted inventory peaks by some 8-12 quarters, though the pace of decline will moderate as inventories lower.

in other words, it seems likely (to me, at least) that house prices will continue falling for perhaps three more years. given that, year over year, price declines are still accelerating -- and that we are nowhere near normal, much less trough affordability ratios that would generate positive carry for landlords -- that seems all the more probable.

gaius marius said...

to toss in another two cents, i think we as optimists tend to make the mistake of presuming that mean reversion means reverting to the mean. but the mean wouldn't be the middle if the series didn't spend half its time below it.

i think its empirically quite well demonstrated that economic series to exhibit momentum. and that is why i don't take too much solace from mark zandi this week.

framing his data as "reverting from 25 to 20 on the way to 14" sounds heartening -- we're halfway there! -- but trough readings, not average, for valuation metrics are probably what is on the way. frames as "reverting from 25 to 20 on the way to 8" is both less assuaging and more realistic, i fear.