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When Higher Inventory Is Not A Sign Of A Cooling Housing Market

Contributed by mm | August 13, 2007 2:40 AM PST

The common wisdom of real estate market is that higher inventory usually means the shifting of bargaining power from sellers to buyers, which means a cooling housing market and brings down price down the road. This cause-and-effect chain has been played out again and again across the nation. However, Elizabeth Rhodes, a Seattle Times business reporter begs to differ:

Why rising inventory isn't having the anticipated effect is hard to pin down, but there are theories.

All revolve around the idea that an increase in the number of for-sale homes isn't necessarily a negative factor that would cause prices to fall.

Theory 1: Last year the number of homes for sale was unusually low, so this year's increase isn't an overabundance that's flooding the market and driving down prices. That's true in close-in Seattle and Eastside neighborhoods where buyer demand is strong enough to handle increased inventory, particularly in the more affordable price ranges.

Theory 2: Move-up buyers, who were reluctant to put their homes on the market last year for fear they wouldn't be able to find a replacement, are doing so now, and that's increasing inventory. Mortgage rates below 7 percent are helping them make the move.

Theory 3: Having heard that sales are slowing, many buyers feel they can take their time. They aren't snapping up houses as fast as they did in 2005 and 2006, so houses are sitting longer on the market.

Theory 4: Inventory is building because overpriced homes no longer can count on playing the "catch-up game."

"Two years ago, if a seller wanted to [insist on a maximum] price, it might sit on the market for a couple of months, then appreciation would catch up and it would sell," Deasy noted. Now they may wait awhile but will eventually drop their price to land a sale.

One has to admire that Seattle's real estate market is still delivering high-single-digit annual appreciation even with the national market as a whole, but is this kind of optimism justified? For the same data set, Seattle Bubble wrote:

As of July, there have now been 20 of the past 21 months that have clocked in with YOY decreases in pending sales. Inventory has been increasing YOY for 16 months in a row, and has now been at over 20% YOY for a full year. For some perspective on those numbers, consider that since the peak of Seattle’s market activity in March 2005, inventory has nearly doubled, with a total increase of 90%, while sales have dipped a total of 28%.

Median prices spiked over $10,000 from June—an unusual month-to-month jump. Not since the late ’90s has June to July seen that large of a jump. In the past I’ve been somewhat skeptical of the “low end buyers have stopped buying” explanation for an increasing median in Seattle, but I think we may finally be seeing that effect in these latest price statistics.

I would side with Seattle Bubble. It is not because I don't own a house in Seattle any more so I will love to see the town becomes more affordable. It is all about Ecnomics 101: market price is driven by supply and demand, and if the inventory is rising up fast, price correction will follow sooner or later.

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This Post Has Received 3 Comments. Share Your Opinions Too.

Q-Ball Commented on August 13, 2007

It seems to me that this author has given four theories that disprove her thesis.

Theory 1 - previously the housing market was too hot so now its just getting back to normal. (So that would mean it is going from too hot to less hot, i.e. cooling)

Theory 2 - Move up buyers didn't want to enter the market because it was too hot. (While this may bring in new demand it also brings in new supply and that supply is coming as a result of their perception that the market is cooling. It may not be an indication that it is cooling but clearly it would be an indication that the consumer thinks it is).

Theory 3 - Buyers are taking longer to buy a house because they heard the market is cooling. (When buyers take longer to buy, demand dips, houses take longer to sell, sellers get nervous, prices drop. That is textbook economic cooling.)

Theory 4 - Sellers can't play the catch-up game waiting for the hot market to catch up to their overpriced house so they have to wait longer and eventually lower their price. (Did someone say ..... COOLING).

I find the article pretty funny. Everything about it says cooling, except the claim that its not cooling.

Josh Mullineaux Commented on August 13, 2007

I lived in Seattle for 8 years and I watched the price of housing go up and up. While there were a lot of factors that contributed to this, it did have a lot to do with supply and demand. When developers have too many houses for sale the prices will drop. We've see this time and time again. Great Post!

Chris Commented on August 14, 2007

I don't care too much if my local housing market is increasing, or going stagnant. That doesn't mean that I am not aware that it is still going up at about 7%-8%/yr.
Why don't I care?
Well, our house was bought with the intention to stay put and raise our family in enjoyable surroundings. We already have that, so we'll be just like Warren Buffet I'd imagine. We bought our house in 2000, and we'll most likely be there until we kick the bucket, even though the mortgage is scheduled to be completely paid in another 13 years (a couple of years before our youngest 2 children enter college).

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