Looking past the Case-Shiller: It’s all about supply

Editor’s Note: This article was guest authored by Scott Sambucci, the Vice President, Market Analytics at Altos Research –  a Silicon Valley-based company that provides real-time real estate market analytics.

With the S&P/Case-Shiller Index released this week (analysis here), everyone is aflutter with talk of a double-dip in house prices. Remain calm.  These are January numbers.  It’s almost April.  More recent figures exhibit more positivity for the 2011 housing market. Here’s how –

Since 2008, as the active housing inventory (the number homes available for sale) rose more sharply, price gains were dampened.  Makes sense, right? Price is the intersection of supply and demand.  In 2011, we’re past yesteryear’s demand stimulus programs (i.e. tax credit), unemployment levels remain obstinate despite recent GDP growth, and homeownership rates are declining.  Not much left to impact prices in the short run except supply.

Here’s the good news for 2011 so far – despite inventory increases this Spring on par with 2008 and 2010, market prices are also rising. Measuring the slope of price and inventory changes in our Altos 20-City Composite over the last four Spring-time markets from seasonal trough to peak reveals that prices are now moving higher relative to inventory than in years past:

Calculation of seasonal trough to peak slope coefficients for Altos 20-City Composite Price & Inventory Measures

In 2008, 2010, and now in 2011, we’re seeing similar slopes in active market inventory. (Remember your algebra – larger slope values mean larger changes over a relative time period.)  In 2011 however, prices are moving higher more quickly than in 2008 and 2010 – periods when sharper inventory increases led to subdued Spring-time price changes. Compare this to 2009 when prices rose sharply in a market with small trough to peak seasonal inventory changes.

The not-so-good news if you’re thinking beyond 2011? This means that we’ve still got a ways to go before we reach “recovery.” While inventory is rising this year, we’re still well below the 2008 cyclical active market supply peak and on a declining path year-over-year compared to last year:

Year-over-year active housing supply: Altos 20-City Composite

This is looking more and more like the start of the long, slow bottom that we talked about back in our December 2010 webcast. From what we’re seeing this year, the downward slide of the S&P/Case-Shiller will end in a couple of months when today’s active listings start selling.  It’s been a nasty winter so give the market a chance to thaw. Just don’t expect a quick reversal back to boom-year price levels. Short run? Stable. Longer run? Lots of “enough already, let’s get on with it.”

Most of all, it may be generous for the double-dip cat-callers to label the 2009 and 2010 housing market a “recovery.” Looking at a longer term price trend since 2007, 2009-10 is now appearing as less of a recovery and more of a deceleration in the market’s downward slide to 2011:

Median Ask Price: Altos 20-City Composite since September 2007

Want to see the numbers behind the numbers?  Then read on…

In the 2008 market, inventory levels (red line) rose sharply reaching a cyclical peak late in the Summer coupled with a minute Spring-time price bounce (blue line):

In 2009, seasonal inventory levels were flat, peaking in the early Spring with banks and mortgage servicers grappling with system constraints and government programs. Home prices responded to tighter supply, the tax credit, historically low interest rates, and relative optimism that the worst of the housing crash was over, despite macroeconomic trepidation with unemployment:

In 2010, inventory rose sharply and peaked in September as banks increased short-selling and introduced robo-signing.  Prices bounced slightly with the tax credit’s extension and continuation of low interest rates, but far less than in 2009:

In 2011, the tax credit is long gone, inflation is emerging (generally a positive for housing), Q4-2010 macroeconomic growth is solid, and there’s the realization that the low interest rate environment won’t be here forever.  Prices are jumping nicely even with a decent spike in available inventory.  (Remember though, inventory is well below 2008 levels):