Although we have always stressed the importance of applying the appropriate degree of skepticism with the new home sales data—either strong or weak—given the sampling methodology, large confidence interval, high rate of standard error, and frequent revisions, one figure that did garner significant attention from the report was the substantial jump in months of supply of inventory (MOS). We recognize that MOS can be heavily influenced by a strong or weak unit sales figure. That said, in keeping with the time-tested motto of “never let facts get in the way of a good story,” the MOS figure became a source of significant consternation in the analyst community.
According to the Census Bureau: “A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in non-permit areas and a sales contract has not been signed nor a deposit accepted.”
This definition is key to understanding the true inventory conditions on the ground. The impacts of COVID, the disruption in supply chains, and the ongoing shortages of skilled labor have forced homebuilders to significantly increase cycle times to build homes and to sell homes much later in the construction process. As such, the true MOS of homes that are actually available for sale is 2.8 months, well below long-term averages. The substantial extension of the home sale process has resulted in a significant mix shift away from completed homes as a percentage of inventory actually being for sales.
Although we continue to believe the substantial increase in both home prices and mortgage rates will cool sales activity and likely lead to a slowing in the rate of price appreciation, the supply and demand imbalance, including the dearth of MOS of existing homes will be supportive of a continued reasonable outlook for the US housing market. In our view, barring a significant recession, a broad relaxation of lending standards or the imposition of adverse federally mandated policies, the US housing market is not in danger of witnessing a repeat of the post-2007 collapse.
Main contributors: Jonathan Woloshin, CIO Equity Strategist, US Real Estate & Lodging
Content is a product of the Chief Investment Office (CIO).
Original blog – US housing inventory: Less than meets the eye, 25 May, 2022.