Don’t Read Too Much into the Days-on-market Stat

Irrespective of how low the interest rates remain; inventory decline is always going to propose a challenge to the buyers.  Of late, we have been mostly seeing a hike in the year-over-year stat of the number of homes sold. But it is open to debate how long can this continue. If declining inventory does not leave enough salable homes, one day- not in a distant time- our year-over-year graph will start curving down.

Not since spring last year has the year-over-year inventory percentage fallen as low as this October. In yet another downer, the inventory has come down to 3.1-month, a level not seen over the last decade (stats by courtesy of RE/MAX National Housing Report). It is highly likely that the low-interest rates won’t be able to contain the affordability question for long if the inventory keeps coming down this sharply.

There is always hope for our species. There is a good reason to believe that more homes will be added to the “affordable homes” list of first home buyers. At least, it is hoped so! At present, the construction efforts are not doing much to satisfy the demand of the FHB. Their buying options are fairly limited.  The new inventory line is also heightening the divide because it shows more homes being constructed in the pricier vertical and scarcer homes in the affordable (FHB) vertical. Naturally, it gives in to a buyer’s market (supply outpacing demand) in the premium market and a seller’s market (demand outstripping supply) in the modestly-priced homes section.

It is to be reasonably expected then that the buyers will keep raising prices of affordable homes. At this moment, the pinch won’t be felt given that any price hike is being offset by the low mortgage rates. But if the inventory doesn’t move up the curve before rates reverse, buyers will feel the heat of low supply-triggered price rise and the reversed interest, on that day in the near future, will only add salt to their wounds.

It is these considerations that render the existing homes sold data and the days-on-market stats almost meaningless. For instance, low days-on-market stat needs to be examined holistically. Despite its pretensions of being a science, most of Economics is a study of human psychology. When inventories decline (as they have been in our country) and there is no reversal in sight, the buyers, rather than waiting for a fresh bombardment of inventory and subsequent drop in prices, start getting paranoid.

Just as what happens in the early days of deflation, the buyers begin to anticipate the worst. Instead of waiting for the cycle to reverse and benefit from supply-triggered price fall, they attempt to take the plunge at the ‘present-day’ prices. “Let’s buy before what is available also runs out”, they think. This reasoning also leads to more home purchases. Put differently, home purchases, instead of being a sign of consumer demand, sometimes become a reflection of consumer fear.

At this hour, it may not be unreasonable to assume that low mortgage rates, stable (un)employment data, and consumer paranoia (explained above) will keep the housing economy interested. Good!