Rising existing inventory in Texas and Florida

I see some chatter about rising inventory, especially in some markets, like Texas and Florida. I have a couple things to say about it.

Existing inventory is similar to new home inventory, in that it’s not such an easy read. Rising inventory can reflect either a strong market or a weak market.

The 2000s Boom & Bust

This all goes back to the odd and wrong intuition people seem to have about the causes of the 2008 housing downturn.

For some reason, practically everyone assumes overbuilding causes downturns. As I recently pointed out, Nobel Prize winning economist Joseph Stiglitz still assumes that about 2008, apparently never having bothered to look after 20 years. And he assumes it with such confidence that he uses the assertion to deflect attention from his own previous work!

It’s something I can usually count on with industry folks in Phoenix. They were there. They saw it happen. They know that it was overbuilding, and so I can tell when I talk to them sometimes, when I say that there wasn’t oversupply in 2008, that’s the point when they decide I’m an ivory tower nitwit not worth paying much more attention to.

Short of an asteroid strike, I don’t think it would be possible to concoct a deeper and more persistent negative demand shock than the 2008 era shock in Phoenix. And, yet the broadly shared intuition to blame oversupply holds.

Most people seem to still think that builders were still flooding the market with speculative new units when defaulted or unaffordable mortgages led to a rise in existing units going on the market and a glut of vacancies. Then, eventually prices collapsed and finally construction collapsed when the excesses of the supposed bubble could no longer be ignored.

That’s, of course, backwards in practically every way. Declining markets were associated with fewer new listings, not an increase. And, I cover all the other factors frequently here and in my books.

There is a common cognitive bias in investing where when you look at historical price charts, deep drops always happen right after the price peaked. Every time! And so the high price seems to have caused the price drop. Looking backward, it never fails. High prices predict declining prices 100% of the time with no apparent false positives!

Operations are a lot more complicated than a simple chart, so it’s harder to clearly isolate that backward looking bias. And of course every operator always thinks all the other operators are over-producing. I think operators will always be convinced that oversupply causes downturns because those complications and biases will always rule sentiment in real time.

In Figure 1, you can see the clear point where sales started to collapse in 2006. Up to that point, inventory of new homes for sale had been rising, generally, in proportion to rising sales. There is a brief period where inventory continues to rise a bit and stays high while sales collapse. So, rising new inventory is positively correlated with expansion, then briefly is slightly negatively correlated with contraction, not amounting to much in terms of additional units.

All the measures on the left axis are presented as a % of the housing stock. So, the “oversupply” of unsold inventory under construction or finished amounted to 0.4% of the total stock of homes, at its peak in 2006 - about 0.2% above normal cyclical lows. Of course, by 2008, “months of inventory” (units for sale/units sold) was extremely high, but that was entirely the result of the depth and persistence of the demand shock and the drop in sales.

Figure 1

Vacancies and existing home inventory for sale are coincident or lagging indicators of the demand crash. Vacant homes for sale, in Figure 1, is simply the mirror image of the demand crash. It was mostly a result of market frictions that were preventing sales from occurring. In Figure 2, you can see a little bit of a jump in existing homes for sale in 2005, but, again, the big jump happens as a result of the demand crash.

These measures don’t really tell you anything that sales haven’t already told you.

Figure 2

Then, as shown in Figure 1, prices are the last thing to give. As Ed Leamer famously pointed out, prices usually don’t give at all. They generally didn’t really need to crash that time either. As with Stiglitz, there was so much pressure on Leamer to lean into the oversupply thesis that he set aside the wisdom of his own research.

It’s crazy really. When Leamer addressed the Fed in August 2007, he was standing in it, in real time. Foreclosures had been rising, but weren’t unusually high yet. New home sales and starts had been in deep decline for nearly 2 years already. Prices had been, generally, holding firm. And, yet he leaned into the oversupply story - we had overbuilt so much that nearly two-years into the deepest construction collapse in decades wasn’t yet enough.

So, given all this, what does the increase in inventory in Texas and Florida mean?

Details below.