March 2024 Residential Sales Update

Before I get to the data this month, I’m going to discuss the inventory of existing homes for sale. Much like interest rates, I think it’s a waste of your attention to pay much mind to it. (It certainly is important if you work as a real estate agent or some related field that depends on transaction volume. But it’s not very useful for analysis of the housing market in general or of new homes.)

Much like interest rates, there seems to be obsessive focus on it, so you can gain a market advantage by simply ignoring it. In both cases, it’s an example of Scott Sumner’s complaint about “reasoning from a price change”.

Rising interest rates can rise for bullish or bearish reasons. And so can the inventory of homes for sale. Also, inventory of homes for sale is frequently treated as a proxy for housing supply, and it just isn’t.

The current trend seems to be to treat existing home inventory as some sort of competitor to new home builders. Even the builders do this.

Here is a long-term chart of existing home inventory from Calculated Risk.

The recent move down in existing home inventory is interesting. In 2021, the decline in inventory happened alongside the decline in new home inventory, and it was the result of a spike in demand in a supply constrained context.

Then, new home inventory recovered to pre-Covid levels while existing inventory stayed low. That is because demand remains strong, but the big swing in mortgage rates greatly reduced trading activity in existing homes. That trading activity doesn’t have much to do with housing supply and demand, rents, prices, etc. So, the missing inventory isn’t particularly relevant to broader trends in housing.

It’s a case of one irrelevant measure (interest rates) affecting another irrelevant measure (existing home inventory), and so there is a whole lot of analysis for us to ignore.

The myths of 2008 come into play here. The spike in existing home inventory that started in 2006 was related to a collapse in sales. That is because the rise in existing home inventory was the result of a collapse in demand. It wasn’t from a rise in new or existing units being sold. It was from a decline in buyer activity.

This is just one of the 1,000 pieces of evidence that is rendered confused by the widely held falsehood that the collapse in 2008 was from a supply glut. That falsehood lends itself to a belief that rising inventory of homes for sale is bad because those homes reflect an increase in supply.

Existing homes for sale increased from 2000 to 2005. Was that bearish for homebuilders?

It is possible to dig deeper to understand whether the current trend in existing home inventory is bullish or bearish. Most of the time, analysis I see that uses the metric doesn’t do that. And, even if it did, why confuse matters by using existing home inventory as the focal point. Just pay attention to the other factors that help clarify if the rise or fall in inventory is bullish or bearish and forget about inventory.

Currently, I see a lot of comments that rising inventory of existing homes for sale is bearish for homebuilders because it represents competition for buyers. Buyers have more existing homes to choose from. But, a rise in inventory today would be related to increased activity and would likely be bullish.

But, don’t tell anybody that I reasoned from existing inventory. Ignore it.

This month’s sales data is below the paywall.