It's The Inventory Stupid

Housing inventory has been steadily increasing across the US. Nationally, the inventory of existing homes for sale has increaed by 36.7% year over year from 2,474,000 in April 2005 to 3,383,000 in April 2006 according to data published by the National Assocation of Realtors.

Nationally, the number of unsold new homes increased 27% from 445,000 to 565,000 between April 2005 to April 2006. In April 2004 the unsold new home inventory stood at 383,000. [US Commerce Department Data]

In the bubble markets, inventory has increased at an even faster pace then the national picture over the past year.

In San Deigo County, housing inventory started off at 13,916 on January 1st 2006 and has risen by a full 45% and was 20,617 as of May 20th (Zip Realty, Bubble Markets Inventory Tracking).

In Los Angelos County, housing inventory started off at 24,463 on January 2nd 2006 and has risen by a full 49% and was 36,689 as of May 20th (Zip Realty, Bubble Markets Inventory Tracking).

In Sacramento Metro area, housing inventory started off at 9,513 on January 2nd 2006 and has risen by a full 52% and was 14,478 as of May 20th (Zip Realty, Bubble Markets Inventory Tracking).

In Phoenix, inventory spiked from 10,748 on 7/20/05 to 43,900 on 5/02/06 according ZipRealty and Bubble Markets Tracking Inventory.

In Prince William County (DC suburbs), see image to the left, the inventory has exploded going from ~1000 to ~4500 active listings in the past year.

In Northern Virginia, a part of the Washington DC metro area, the number of active listings was 2,983 in April 2005, which increased by 241% to 10,038 in April 2006 (MRIS).

As Jim A wrote in a comments section of the The Housing Bubble Blog:

It’s all about the inventory, stupid. Back when there was no inventory to speak of, say the ‘03-’04 timeframe people in the market to buy a house would have the repeated experience of having houses that they looked at go under contract before they could decide to buy or not. Low inventories create a “buy now or it’s gone” frenzied atmosphere.

But prices have risen far above the cost of construction, so that builders have put huge inventories of new homes (especially condos)on the market. With these large inventories, buyers don’t have to jump immediately just because a nice house is for sale. They can take their time, if one house sells, there are plenty of others on the market to choose from. They’re no longer pressured to meet the sellers price immediately or lose the chance at the house. They can offer less and see how desparate the seller is. This is why the idea that we have reached a new plateau of prices where forever in the future people will pay a higher percentage of their income on housing is so absurd.

The dramatically increasing supply of housing units in bubble markets across the country has and will continue to change the housing market. Meanwhile, demand is also declining albeit at a much slower rate then the increase in inventory. The dramatic increase in supply coupled with the moderate decrease in demand is causing price declines in most bubble markets.

So, when that Phoenix Realtor tells you to offer the full 350K asking price for a house which was bought 2 years ago for 220K, just respond "It's the inventory, stupid" and "You're fired!"