Saturday, September 17, 2022 / by Bryan Baylon
We have long considered the Days of Inventory one of the best and most reliable indicators of the housing market. Please see the definitions section for a precise description of how it is calculated.
Below is the weekly chart for all areas & types within the ARMLS database.
The market is strong when the days of inventory are low and weak when they are high. We like to use the annual sales rate to measure inventory because it is far less volatile than the monthly sales rate used when calculating months of supply.
In the chart we can see that the first indications of weakness in the market in 2022 came in April. The period from May through July shows rapid deterioration because active listings were growing very fast while the annual sales rate was falling. The deterioration slowed in August when active listings grew much more slowly, but the annual sales rate continued to drop.
We are now seeing signs that the situation is deteriorating again because the days of inventory has started to move higher at an increasing rate over the past 2 weeks. This is because higher interest rates are removing more buyers from the market. Our low number of new listings appears excessive relative to the present demand. Both are exceptionally low.
However, to put things in context, we have not yet reached the level of inventory we saw in September 2016, which was considered a normal year in which prices moved modestly higher. Nobody was too concerned in 2016, so why is there so much panic around now? There are several reasons:
- We got used to very low inventory between 2020 and early 2022 and the current levels are much higher than we are now accustomed to. They feel higher than they are.
- Social media is full of predictions of disaster because that is what attracts viewers and therefore rewards the person posting the bad stuff. People are primed to believe bad news more than good news.
- The trends in 2016 were slowly improving whereas now they are slowly deteriorating. The latter feels much worse emotionally.
- We have large inventories owned by the iBuyers and they are highly motivated to reduce them. This puts extra and unusual downward pressure on pricing.
Until a week ago, it looked as though the 2022 line could easily stay well below the 2016 line, bringing comfort to sellers and undermining the predictions of disaster. With interest rates above 6% things do not look so reassuring. It is now easier to imagine the 2022 moving above the 2016 line.
Even so, we don't see disaster as likely in the near term because the rate of arrival of new listings is so low. Collapses in price occur when inventory becomes excessive. In week 38 of 2007 we had 340 days of inventory. When considering the current 73 days of inventory it is a good idea to keep that number in perspective. It is still quite low compared with the long-term average, which is 117.
Market insights provided by The Cromford Report.