by Calculated Risk on 4/12/2011 05:07:00 PM

CR note: With all of the discussion of shadow inventory, it is important to note that there are questions about the "visible inventory" too. The following is an excerpt from an article by economist Tom Lawler:

When trying to “measure” the “months’ supply” of homes for sale, most folks compare the number of active homes listed for sale on a MLS (active listings) to the number of homes actually sold (some analysts prefer to look at listings vs. contracts signed, but most folks – and the NAR – compare listings to home closings.)

What may surprise some folks, however, is that there is actually some controversy over how the inventory of homes “for sale” should be measured. E.g., should one include listings on which there are contracts “pending”? Should one include only some pending sales, but not others – e.g., not “contingent” listings or listings that require the approval of a lender (e.g., short sales)?

The issue has become more “interesting” over the last few years as the number of “contingent” listings and short sales listings has surged.

As an example of this issue, here is a comparison of various “inventory” measures from the Tucson MLS, a wholly owned subsidiary of the Tucson Association of Realtors.

Tucson MLS "Active" Inventory
	3/31/2011	3/31/2010	3/31/2009
Normal Active Listings	6,703	6,799	7,415
Normal Pending	565	457	339
Active Contingent	1,228	928	753
Active CAPA	359	164	116
Total Inventory	8,855	8,348	8,623

“Active Contingent” means that the Seller has already accepted an offer, but that there is still some condition, or contingency, to be met, such as inspection, buyer’s final loan approval, appraisal, etc. For ‘Active CAPA,” CAPA stands for “can accept purchase offer,” and traditionally this category has been used when the seller has agreed to sell the home to the buyer, but the buyer must first sell his/her home. However, in March 2008 the Tucson MLS board of directors, in response to the rising number of short sales in the area, made the following recommendation:

Effective immediately, the MLS Board of Directors recommends the following regarding Short Sales: Short Sales are to be reported as ‘Active CAPA’ if there is supporting language written into the Purchase Contract. If the language supporting ‘Active Capa’ is not present and written into the Purchase Contract, the status should be reported as ‘Active Contingent’. This is in addition to the statement ‘Short Sale, subject to court or lender approval’ being written into the Agent Only Remarks.

As best as I can tell, a short sale where the lender has not yet approved the sale could show up as either an “active CAPA” or a “Active Contingent,” depending on the contract language.

In its press release, the Tucson Association of Realtors’ summary tables show “active listings” as being the first line item in the above table. By this measure, the inventory of homes “for sale” in Tucson has declined from 7,415 in March 2009 to 6,799 in March 2010 to 6,703 in March 2011.

If instead one used the broader measure of “inventory” (shown later in the TAR report) to include all homes listed for sale, then the “inventory” of Tucson homes for sale last month was HIGHER not just a year ago, but two years ago as well! Note that the % of “total inventory” that is either “contingent” or “CAPA” has gone from 10.1% in March 2009 to 17.9% in March 2011!

As I’ve noted many times before, in a number of markets around the country the “fallout” rate for pending sales has been much higher over the last few years than was the case many years ago, especially in the “more depressed” markets. As such, an inventory number that excludes ALL pendings, including contingents and “CAPAs,” doesn’t seem “quite right.”

Now inquiring minds probably want to know: what do other MLS “mean” when they report the number of “active listings” or “months’ supply,” and what do they report to the National Association of Realtors, which uses the “months’ supply” measure supplied by the MLS in the sample it uses to estimate national home sales and the national inventory of existing homes for sale?

On the first question the answer for many is “I don’t know,” as only some report a breakdown by type of listing. And on the second question, the answer I got from a NAR spokesperson was “it depends on the local MLS!!!”

CR Note: This is from economist Tom Lawler.