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[Sticky On The Downside] The Economics of Inventory

In the August issue of Mobility Magazine, a publication of the Employee Relocation Council [1], economists Anton Haidorfer and Edward Seiler explore the relationship of the level of inventory against the rate of change of housing prices in their article:

The Economics of Inventory: Using the Number of Homes for Sale to Learn About Local Housing Markets [2]

The inventory-to-sales ratio (I/S) measures how quickly the market can absorb the current stock of homes for sale at the given sales pace. Historical data has shown that when an I/S measure is near seven to eight months, real home prices grow at the rate of inflation. That is, when supply equals demand, home prices are bid up at the same rate as inflation or the cost of construction. Data also show when I/S is greater than seven months that real home prices fall and, when I/S is less than four months, home prices rise very quickly.

The red line on the chart marks the point where the amount of supply relates to no home price appreciation. Notice how the trend line is steeper to the left while rising (less supply) and the more gradual to the right while falling.

Good stuff.

“Jonathan, take a memo – you need to do this for Manhattan.”