February 2012 Resale Data Rodeo

The median price per square foot was mixed last month, with single
family homes up 2.0% but condos walloped for 4.3%.  In
aggregate, prices by this measure were mildly up simply because a
lot more single family homes than condos sell each month.  In
any case, the single family series tends to be smoother and a more
reliable indicator of what’s really going on, so I’d say February
was a mild win (or at least a tie) for prices:

The plain vanilla median exhibited a similar pattern:

The proxy for future Case-Shiller index releases, calculated (as is
the CS index) based on detached home prices, nudged up by .2% for
the month:

Here are the median price per square foot and Case-Shiller proxy
graphs aligned with the calendar years for purposes of spotting
seasonal patterns:

The number of closed sales was slightly down, which is better than
usual for recent Februaries:

Pending sales were up buy a pretty typical amount month to
month.  Note that both closed and pending sales (especially the
latter) were higher than in any of the past three years):

Now here’s where it gets interesting.  Inventory was actually
down for the month, something that has not happened in recent
Februaries.  The number of homes for sale was down 20.5% from a
year ago:

But that decline masks the actual tightness of inventory to some
degree, because an increasingly large percentage of inventory is
“contingent”:

To review, contingent inventory primarily consists of short sales or
bank-owned properties on which an offer has been accepted, but not
all terms have been approved by the lender.  While the deal is
not closed, and may not close (ie, the property may end up back on
the market), a contingent property is effectively off the market
while it’s contingent.   Our own urbanrealtor wrote all
about this a while back in this
voiceofsandiego.org piece, for those who’d like more
background.

When we pull out contingent properties and look only at “active”
inventory, we see that actives are a full 33% below where they were
a year ago:

The MLS didn’t start separating out contingents until mid-2009, so
unfortunately we lack the historical data to do longer term
comparisons.  So I use overall inventory for my “months of
inventory” number.  But I think it’s good to keep an eye on how
much is active vs. contingent.  In this case, we know that if
anything, overall inventory numbers are currently giving the
impression that supply is less tight than it actually is.

Even considering that, the overall inventory numbers look very
tight:

Months of inventory cracked through the 4-month barrier to 3.8
months.  This is a very low level of supply compared to recent
history.

Here’s an old graph I just updated for voiceofsandiego.org shows
that there has been a correlation between months of inventory and
price changes.  (Thanks again to Calculated Risk for the
inspiration on this graph).  Here’s how the graph works: the
blue line is months of inventory, but it is inverted so that it
moves directionally with prices (this is necessary because lower
inventory correlates to higher price changes).  The red line is
the annualized monthly change in prices (per the Case-Shiller index
and then my proxy of same for the most recent two months).

You can see that the correlation has been pretty good.  The
series have tended to move directionally together, and there has
also been a general tendency for prices to increase when months of
inventory was under 6 (the thick black line), and to decrease when
inventory was over 6 months.

The relationship has only really broken down twice over this time
period.  The first was in late 2008 and early 2009 when
inventory got a lot tighter, but prices continued to plummet. 
I had theorized that this was due to the generalized doom and
uncertainty of the financial crisis overwhelming shorter-term
inventory considerations.  Note that price growth made a big
catch-up move to the upside once the crisis phase was over.

The second (less dramatic) breakdown has been the period since
mid-2011.  Despite inventory hanging in at under 6 months,
prices have been steadily declining.  If I had to guess, I’d
say that the preponderance of foreclosures and short sales is
keeping prices lower than they otherwise would be at similar levels
of supply.  Even still, the Case-Shiller proxy shows that price
changes may have at least turned positive as a result of this latest
decline in inventory.

One last observation on this chart: prior to the current period,
during those infrequent times when inventory was at or below 4
months, prices have always been rising (and usually pretty
fast).  And foreclosures were a big issue back then, too.

These inventory levels say nothing about the longer-term prospects
for housing, nor about exogenous factors that could come into play
and change the supply/demand picture (abruptly higher rates being a
favorite example).  But they do tell us about price pressures
in the months ahead.  The current rather dramatic tightness in
supply is hinting that the price pressure could be to the upside.