Tuesday, May 30, 2006

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!"


  1. What i don't understand is why rents aren't starting to decline. Everywhere I look in the DC metro area rents are going up this year compared to last. I always thought that when the housing market slowed down rents would follow suit because sellers would rather rent than have to sell for less. Aren't all those condo's that aren't selling going to be rented out causing excess rental supply? Or are all the condo conversions causing a decrease in rental supply? Or is it because people that would have bought a house are renting instead causing more demand?

  2. Don't forget that the population is increasing; especially given the strong job market in DC. New arrivals who come for work, rent.

  3. Although the rental market could become interesting - if there are a lot of "investors" who can't get their asking price for their condo, they may try to rent, which could stagnate or decrease the price of rentals, having the exact opposite effect for these "investors" as they were hoping.

  4. "Everywhere I look in the DC metro area rents are going up this year compared to last."

    I don't see that. My apartment in Silver Spring gave me a $20 a month increase. This includes all utilities, so I am sure it is a real price decline.

    Other buildings in Silver Spring are offering 1-2 free months. A little while ago, I heard about similar things in Alexandria.

    So I am not sure you are correct that rents are going up.

    A Redskins fan

  5. My rent went up $20/month. The increase covers property taxes and substantial property insurance increases, this is in College Park. I smell stagflation.

  6. Renting is still expensive within the city limits of DC, and inventory doesn't come close to approaching the for sale inventory. The bubble theory holds that as demand decreases and supply of condo units continues to explode, many speculator owners will try to lease out their places to avoid taking a huge loss by selling. This may well happen, but a brief search through craigs list or the washington post for rent section will tell you that it's not yet true. Almost all for rent properties being advertised now are the big rental buildings, and they ain't cheap.

  7. I don't have any real data, but my personal experience during the last downturn (early 90's) is that rents stayed strong. I certainly did not decrease my rents or have any vacancy problem.

  8. 'I don't see that. My apartment in Silver Spring gave me a $20 a month increase. This includes all utilities, so I am sure it is a real price decline."

    Silver Spring - hahahaha, yeah, that's a real desirable locale.

  9. I don't suppose trends like these would cause any of you to reexamine your preferred conclusions about the real estate market, right?

  10. anon,

    what percentage is 20$ a month?

  11. I think that rents will be all over the map in the upcoming years so shop around for the best deal! This is because there are different types of landlords:

    1. Owners who bought a long time ago (5 or more years) and are pulling in a lot of profit while still offering a good deal to renters.

    2. Flippers and/investors who are in a negative cash-flow situation with their mortgage v. rent. These are some of the people asking for absurd rents and they are also the ones on craigslist.

    (On craigslist btw there have been more ads for people advertising "last chance to buy before I offer this for rent.")

    3 - Large companies (like Charles E. Smith). I know less about how these companies establish rental rates - for current residents, I know they raise the rent every year regardless of the health of the rental market.

    It will be interesting to see how many of the condo constructions in DC convert back to apartments. Although it is my understanding that if even one person buys, the builder can no longer do that...

  12. I've done some searches on Craig's list and Washington Post. I agree rents are all over the place. Hopefully rents don't go up because it will force the fed to keep raising rates.

    NOVA Fence Sitter

  13. I have recently gone through the rent vs. buy decision for SFH in NoVA. Certainly rent is not cheap compared to other locations, but compared to buying, it is not bad right now. I will rent a SFH in McLean for 2700/mo. Same house sells for ~750K. Allowing for a 20% downpayment of 150K, this amounts to roughly P+I of 4200/mo and PITI of 5200/mo. Allowing for a tax rate of 33% gives a tax-advantage adjusted monthly payment of $3900. In a soft-landing scenario of 3% inflation and 3% home appreciation going forward,with a fairly conservative 7% return on investments it takes >8yr to break even on this home. Currently, the only people in the DC area that can cover ownership expenses with rents are those that bought before the appreciation of recent years.

    I'm not sure what will happen to rents going forward. There are factors that could affect the supply and demand side. I can tell you that at current prices, they are a bargain.

    -an interested observer

  14. Part of the reason rents will stay strong in the DC area is that a big driver of the real estate market is the $500K tax-free incentive from selling a place you live in (2 of the past 5 years). Now I have no idea on the percent of investors who were buying and selling within too short of time to rent, but I'd guess that many investors who owned more than one property would do something like this: Live in property A for two years, rent out property B. Live in property B for two years, rent out property A for two. Sell property A (tax exempt), rent property B, live in new property C. When lots of people are selling every two years, volumn is gonna rise. Overall though, I'd imagine that many investors are already renting out their places, which is why rent won't soften like real estate (rents were already soft, though DC is one of the strongest rental markets in the country). For those who have seen relatively small increases in rent, it makes sense for landlords NOT to make big increases in rent since it is usually more costly to find new renters than increase the rent (not including some rent-control areas obviously).

  15. There is a CPI Housing Rent Index for the D>C> SMSA available through a gov't office (Bureau of something or other).

    It was essentially flat through most of the nineties. I know this because I had one house where rent increases were tied to this figure.


  16. Rents are increasing because many apartment units have been converted to condos around the Washington, DC region. Lower and middle income people are basically thrown out of their old facilities and they have to find scarce rental units.

    Second, a small number of people bailed out of the ownership market because of the bubble. They sold at the "peak" price. These former owners are sitting the bubble collapse out through renting.

    Third, this effects Maryland renters. The Maryland Public Utilities Commission is allowing the dramatic increase of electric utility rates by carriers (i.e. PEPCO and BG&E). PEPCO customers will see a 30-40 percent rate increase beginning this summer. This also effects apartment buildings since the management companies must now pay higher utility rates to keep the juice flowing for their tenants. There are still many apartment complexes that include the utilities with the rent. My rent increased 8 percent becuase of the electric rate hike.

  17. "what percentage is 20$ a month? "

    For Silver Spring? Probably 200%.

  18. From WTOPNEWS.com.

    FAIRFAX, Va. - Communities near Fort Belvoir need more state and federal money before thousands of new military jobs arrive at the base, a Fairfax County supervisor says.

    Fort Belvoir is slated to pick up about 21,000 jobs starting in 2011 after Walter Reed Army medical Center in Washington and other military installations are closed.

    Supervisor Gerald Hyland of the Mount Vernon District says roads and other local infrastructure will need to be upgraded.

    Hyland says projects on the Fairfax County Parkway, Route One and Woodlawn Road must be completed by then.

    The county's Planning and Zoning Department will look at the effects on schools, parks, water, sewer, and other systems once the Army gets recommendations on the new job sites.

    (Copyright 2006 by The Associated Press. All Rights Reserved.)

  19. I like the idea that rents are increasing because condo conversions are limiting apartment supply.
    It's also possible that rents have been lagging so far behind purchases because so many people want to buy that it was limiting rental demand, and now that purchase demand is softening, more people want to rent? Who knows.


  20. am i the only one overhwelmed by the inventory? there's so many houses on the market i get a headache looking at all the ones in my price range. not that i'm seriously looking, just bubble watching

  21. I like the idea that rents are increasing because condo conversions are limiting apartment supply.
    It's also possible that rents have been lagging so far behind purchases because so many people want to buy that it was limiting rental demand, and now that purchase demand is softening, more people want to rent? Who knows.

    I think you raise an interesting point, which reinforces the general economic principles at play.

    First, I don't know about the absolute or relative number of condo conversions in DC or other markets. My own anecdotal observation - no data behind this - is that condo conversion has actually been relatively modest compared to the 80's. I don't think that many rentals have been taken off the market in conversions.

    Second, you point out that as demand for ownership declines, rental demand increases, which should put pressure on rental prices. As rental prices increase, owning a home becomes more cost-effective, and you shift some demand back to home ownership.

    It's the principle of equilibrium - supply and demand tend to work these things out.

    Say persons X1 through X10,000 take the advice of any number of anonymous posters here and sell in a panic. Now X1 through X10,000 need a place to live, and their demand shifts to the rental market.

    Since the housing market is divided roughly 2/3 owner/occupied and 1/3 rental, the shift of people from the ownership market to the rental market has a bigger impact on rental prices, all other things being equal. So if housing prices decline by 10% in the ownership market as a result of that 10,000 household stampede, rents will increase by 20%. Again, all other things being equal.

    Now, if rent prices go up 20% and home prices go down 10%, you've got a new rent/own ratio, and, on the margin, people are more likely to buy. Maybe 3,000 of those 10,000 shift back to ownership, and you've got a 3% rebound in home prices and a 6% decline in rents.

    In reality, the feedback loop on supply demand is more dynamic than that - it becomes increasingly harder to convince x2, x3, x4 .. . to go to rental as rents increase. So you wind up with an equilibrium more like a shift of 6,500 people and housing price declines of 6.5% and rent increases of 13%.

    These numbers are all made up, by the way, and shouldn't be taken as any kind of prediction. But it does illustrate the kind of rental/ownership feedback loop that creates resistance against steep housing price declines.

  22. The housing slowdown will probably take upto a
    year to start affecting other sectors of the economy.
    Job growth which has been especially strong in the DC
    could be other factor why rents are not declining just

  23. Rents may decrease in the next year as investor owned houses/condos that are for sale are pulled off the market because the price has dropped. Many of these houses are empty right now. They could flood the rental market.

  24. DC is losing population????

    How is that relevant at all to this discussion? First, the population was limited to certain areas of the District of Columbia, not the metro area as a whole. Second, the population decrease did not mean you had empty houses, it just meant you had 1 or 2 people to a house instead of 4 or 5.

  25. JimL - there's a flaw in your logic. As real estate prices start rising more slowly, or stop rising altogether (as in the case of the DC condo market), then there will be no more buy-live in 2 years-sell rotation going around, because there won't be $500K increases every 2 years.

    I agree a lot of people are now cashing out their $250-500K tax free profits, but this is the last time in this cycle they get to do that - their next purchase won't appreciate anywhere near $500K in two years, and in fact they may actaully loose money.

    The "ring around the rosey" game has come to a stop, and a lot of would-be sellers have found that they've fallen and can't get up.

  26. supernova - your analysis is based on a fundamental assumption, which may be incorrect. you assume that for each condo converted to a rental, there is now a need for the owner of that condo to need a place to rent.

    This is not entirely true. There are many buyers who recently purchased multiple condos, hoping to sell them to an "end-user". These end users are not materializing because all the real end-users already have found places to live.

    Their real end-user was another speculator, also buying multiple units.

    Now that the speculation is coming to an end, we find that DC has a whole lot more condos than anyone ever really needed, and this will be reflected both in decreases of rent and housing prices.

  27. Good comments dc_too. Speculative renting--well, if you could do it, I'm sure there are some that would...

  28. Sorry, comment got cut off..Your arguments are sound, and the Frederick News-Post has a great article on how the federal spending is at unsustainable levels no matter which party comes in in 2008, and that this could be the trigger for the next recession. If MD is hit hard, DC will likely take some of that hit as well, although not as badly. Less gov't spending doesn't bode well for areas that rely heavily on fed workers.

  29. This is not entirely true. There are many buyers who recently purchased multiple condos, hoping to sell them to an "end-user". These end users are not materializing because all the real end-users already have found places to live.

    That's why I said "all other things being equal." It is of course entirely possible that the rental market has pent up supply that can absorb the new demand for housing. I'd look to vacancy rates in rental housing for some answers on that.

    My post was not meant to assert any particular data, but to note that as demand shifts from the home ownership to home renting markets, that shift in demand tends to put a brake on the economic stimulus causing that demand in the first place. The market defends the equilibrium pretty forcefully.

  30. dc condo watcher -- you are correct that the merry-go-round will slow down or stop. My point is that many of these units are already in the rental market by those who planned to rent them out, so there won't be a massive inventory spike.

    Of course, nobody really knows what percent are those who levereged themselves to buy 4 condos and flip them veruss those who took a conservative approach. DC, however, is one of the strongest rental markets in the country due to the transient nature of people living here. Barring a financial catastrophe, I'd guess that as more people decide not to buy that the pressure on the rental market will increase. Renting or buying, people need a place to live.

  31. I expect the gap between rents and prices to revert towards the historical mean as the value of housing as an "investment" (i.e., the investment fad) fades. The question is whether this will come about from declining/stagnating prices, increasing rents, or some combination of the two.

    The early evidence is pointing towards some combination of the two. However, prices are certainly further from the fundamentals at this point than rents.

  32. For a guy who claims to want to help people, David is giving some awful advice.

    David actually thinks it's the realtors who tell their clients to set a high list price, because the eeevil realtor wants to make as much money from the commission as possible.

    Actually, realtors tend to encourage people to sell their house at too low a price, because realtors capture just 6% of the benefit of the sale price, and make their money by turning over houses quickly, not by holding out a long time for a higher price. After all, if you sell your house for $10,000 more by waiting a week longer, a realtor only sees $600 of that, and they aren't interested in working longer and waiting longer for that $600, when they could be spending that time selling other houses.

    In fact, Steve Levitt the economist found that realtors kept their own homes on the market 10 days longer and sold them for 2% more than when they were selling other people's houses.


    By the way, don't waste our time with by asking if Levitt adjusted for "this thing" or "that thing." First read the paper carefully if you're going to get into that. Economists are masters at the empirical methodologies that adjust for various differences.

    So David's just plain wrong on this. Sell your own house, keep your expectations realistic, but don't let a realtor pressure you into lowering your list price too much, because that realtor just wants to move your house as fast as possible.

    Remember, David's just a blogger with an agenda, and not always a good source of advice.

  33. Why would an agent take on an overpriced listing? Perhaps they plan to get the seller to lower the price in a few weeks. Perhaps the agent suggested a high price to get the listing - knowing full well that a reduction would be necessary.

    I don't trust agents. There is too much of a conflict of interest going on. I have seen alot of unethical behavior over the past 25 yrs and have learned from my misjudgements of people.

    I trust myself. I do my own due diligence. If something is a terrific deal, I call only the lister. They don't want to split that commission and will push my deal.

    There are some excellent agents out there I'm sure. I just haven't encountered any.

  34. "I don't trust agents. There is too much of a conflict of interest going on. I have seen alot of unethical behavior over the past 25 yrs and have learned from my misjudgements of people."

    The only agent I would hire is one that lived in a house just like mine in my neighborhood. That would give them the maximum incentive to get good deal.

    But I still wouldn't pay full price even then.

  35. keith - i could also make a judgement call about your posting and say that you have a vested interest and hidden agenda in not having other sellers lower their prices - I could assume that you are trying to sell or will soon try to sell your own property in the DC area and therefore you have an interested in prices remaining high to get good comps....

    not saying that you do, but trying to make a point, that unless you know for sure don't assume anyone has a hidden agenda - it seems the agenda here is to enlighten people on the housing excesses of the last few years, and to stop the destructive behavior now but it takes us ALL down soon.

  36. " What do you guys expect from the Fed minutes out at 2pm today?"

    Worries about inflation. Some mention of cooling or slowing housing market.

    "Any references to Japan's housing collapse?"

    No way. Can't panic the market.

    "How will the market react?"

    Not much reaction.

  37. Jim, please find a better place for you money, TIPS "protects" you only from hevily supressed CPI increases, not from real inflation...

  38. “Fritz said...
    Rather than reading about economic fundamentals and how RE has moved historically, Bryce is too busy posting his hopes and fears on this website, wishing them into existence.”

    And “fritz” and SuperNoVA are posting here to try to plug the damn. “All things being equal” can you sell the matching H2’s to help pay off the HELOC?