Tuesday, July 29, 2008

Housing Inventory Finally Heading In Right Direction

People looking for a glimmer of hope that declines in housing prices might someday drop can now revel in the fact that housing inventory is finally beginning to shrink. While this certainly does not mean we are out of the woods yet, it is a positive sign that thing are starting to head in the right direction. One of the reasons prices fell so much was because there was too much supply; the quicker the supply goes down, the sooner we can expect a balance between supply and demand and find that equilibrium for housing prices.

I’m not going to predict when the housing market will begin to turn around, or prophesy the date people need to start buying homes, but I do know that until the supply falls (and by a lot), we will continue to see declines in housing prices. Demand is being squeezed by several factors, including tightened lending standards, consumer fear and the fact that people are stuck in their homes (or they owe more on them than they are worth and can’t sell them because they don’t have the cash to pay off the balance). There are still people ready and willing to buy homes, but that number pales in comparison to the supply, and as long as there are a lot of options, buyers are going to be demanding of sellers and prices should be expected to drop.

The Wall Street Journal just published a helpful chart that covers most of the large metro areas across the country. It shows the change in the market’s housing stock along with how many months' supply is available and even the employment outlook for the area. Obviously areas seeing increased employment can expect a stronger and faster recovery, as new jobs will increase demand for housing. According to the numbers on their chart, one market I would be concerned about is Portland, Oregon. They have seen a huge increase in inventory (27.8 percent)and have almost a 10-month supply of housing, but only average job growth.

The drop in supply that we have seen thus far is really pretty minor, but it marks the start of the process that needs to take place in order for a recovery to occur. As long as the supply continues to shrink, and demand doesn’t shrink with it, we should slowly start to see signs of recovery in the housing market. Keep in mind, though, that it is going to take a while; as for how long it will take, your guess is as good as mine.

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