The total inventory of homes available for sale fell in December for the first time in 16 months. The decline was very modest of less than 1 percent from the comparable month the year before. Nonetheless, it represents a reversal to the general growth of listings that had been occurring throughout 2014. Months supply is already low at 4.4 months. More inventories are needed, not less. Or else, home prices could re-accelerate.
Specifically, at the end of December there were 1.85 million properties listed for sale, down 11 percent from November and down 0.5 percent from one year ago. The monthly decline was fairly normal which occurs every year from November to December. But what is of interest is the year-over-year decline in inventory because this hints at possible acceleration in home prices in upcoming months.
For those technically minded, after applying statistical seasonable adjustment factors, the inventory has declined for two straight months, implying a genuine tightening of supply. Therefore, home prices could re-accelerate.
Home prices in fact appear already to be re-accelerating. In spring and summer of last year, the median price was rising at 4 to 5 percent. In November and December, the price increased by 6 percent.
Do not expect any help to inventory from distressed properties. The shadow inventory – those homes already in the foreclosure process or with serious mortgage delinquency – has greatly shrunk. Hence, far fewer newly foreclosed properties will be hitting the market. Those REALTORS® who specialize in distressed property sales should be aware that there will be less business opportunities in this field going forward.
Because of shorter supply, distressed properties are no longer being sold at deep discounts. Many buyers of these previously thought to be worthless properties have done well in terms of rental return and price appreciation. From this experience, buyers are now eager to bid up.
As a country, America has been a fine real estate investor. What was thought to be worthless properties were acquired on the cheap. France sold the vast ‘useless discovery’ made by LaSalle – the Louisiana Territory – to America for a mere $15 million. Few years later, the ‘insect infested’ land of Florida was bought for $5 million from Spain. The mocked ‘icebox’ of Alaska was purchased at 2 cents an acre from Russia. (The mocking ended when gold was discovered). But the paradise island of Cuba was not purchased or even given the chance after serious and realistic considerations during President Buchanan’s term.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.