by Calculated Risk on 1/26/2010 09:56:00 PM

James Hagerty at the WSJ writes about existing home inventory: Housing Momentum Builds but Perils Persist

Inventories of homes listed for sale are down sharply across the U.S. and have reached very low levels in some areas ... The decrease in supplies has sparked a return of bidding wars on lower-end properties in some neighborhoods, but the national picture is mixed.

We've been discussing the bidding wars on low end properties since last spring - and that frenzy was driven by a combination of a high number of foreclosures at the low end pushing down prices (what housing economist Tom Lawler called "destickification"), and the first time home buyer tax credit. In some areas - like San Diego - the frenzy has moved up to more expensive areas.

But the national picture is still ugly.

Click on graph for larger image in new window.

This graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.29 million in December from 3.52 million in November. This is not seasonally adjusted and December is usually the lowest month of the year - and this decline was mostly seasonal.

Inventory levels are still well above normal even though the number of units For Sale has been falling for some time.

The second graph shows the year-over-year percentage change in inventory and the months of supply.

Note the sharp increase in mid-2005 - that was one of the signals that helped me call the end of the boom phase of the housing bubble.

The YoY change has been negative since mid-2008, indicating that inventory is declining. However the months of supply is still above normal (usually 4 to 6 months), even with sales (the denominator) being pushed artificially high.

In a normal market, sales would be about 6% of owner occupied units per year, or close to 5 million units per year. Six months of inventory would be something under 2.5 million units - so at 3.3 million, the level of inventory is still a long way from normal. And this doesn't include all the various shadow inventory that will come on the market.

In a normal year, inventory starts to increase in January (many homeowners remove their homes from the market during the holidays). I wouldn't be surprised if the YoY change was no longer negative some time early in 2010. And I'd expect inventory levels to be above normal levels for an extended period.