by The KCM Crew on August 20, 2010

We have been discussing home prices in this blog for over a year. The principle of ‘supply and demand’ has been our rallying cry for the entire duration. Pricing of any item is determined by the number of items for sale in ratio to the number of purchasers looking to buy that item.

Here is an industry guideline we have used:

  • 1-4 months inventory means it is a sellers’ market and we can expect appreciation.
  • 5-6 months inventory means it is a balanced market with prices following inflation.
  • 7+ months inventory means it is a buyers’ market and we can expect depreciation.

It now appears that the National Association of Realtors (NAR) is letting their membership know that ‘supply and demand’ will determine house prices for the foreseeable future. In two separate reports released on Wednesday, NAR addressed the issue of both an increasing supply of homes for sale and a decreasing demand.

In Economic Commentary: Varying Signs, Lawrence Yun, NAR’s chief economist, speaks of the anticipated demand for housing for the rest of the year:

“One thing is clear, however: slow business spending will mean slow economic expansion and a slow pace of job creation. The frustration of traveling at 40 mph on a wide open 70 mph freeway will be with us for the foreseeable future if businesses continue to hold back. The unemployment rate could also remain stuck at a stubbornly high level — 9.5 to 10 percent. It also means that home sales in the second half of this year will be markedly slower than in the first half of 2010.” (emphasis added)

Jed Smith, Managing Director, Quantitative Research for NAR in a report titled The Housing Markets: Supply, Demand, and Current Issues addresses increased supply:

“There has also been concern over a potential shadow inventory of distressed properties: as of the first quarter of 2010 over 6.5 million homes were in foreclosure or had overdue mortgage payments. Possibly as much as 75 percent of the shadow inventory will ultimately be sold as distressed. However, given the ongoing time delays for problem resolution it appears that distressed properties will enter the market at approximately the current or a slightly increased rate for the next few years. Foreclosures are a major negative market influence in terms of price, consumer confidence, and expectations; however, a tsunami of shadow inventory appears unlikely.”

There are 4.875 million distressed properties that will come to market (75% of 6.5 million). Last year, according to NAR, there were just over 5 million homes sold. If not a tsunami, there will at least be some very stormy weather as we hope for a recovery in housing. Smith goes on to say:

“A number of homeowners who have deferred listing their homes due to market conditions may also now reenter the market, resulting in increased home inventories as the economy recovers. Once the employment numbers improve, pent-up demand may help to increase sales. In the short run, however, we may actually see additional inventory on the market as a result of listings by deferred sellers.

More and more homeowners that had held off putting their homes up for sale in hopes of a housing recovery, now realize that a recovery may not occur for some time. They are now placing their homes on the market.

What does that mean for prices?

The report by Smith puts it all into perspective:

“An increase in the inventory of unsold homes indicates that there is an excess supply relative to demand…Prices tend to rise as supply falls. During the first part of 2010 the months’ supply of inventory decreased from earlier highs—accompanied by stabilizing prices. In June, month’s supply increased to 8.9 months from the previous 8.3 months. If the increase proves to be a temporary adjustment due to pent-up listing of homes, then prices should continue to stabilize, particularly if employment increases. If inventory supply continues to increase without adequate job increases, the housing market will be subject to additional pricing pressures.

NAR releases their Existing Homes Sales Report next Tuesday. We’ll report on the months’ supply of inventory shown in that report.

http://kcmblog.com/2010/08/20/nar-says-its-now-about-supply-and-demand/#more-5544