We got some encouraging news last week about March existing-home sales increasing almost 7% from their levels in February.

Unfortunately, a deeper look at the numbers from the National Association of Realtors reveals that inventory of for-sale homes also increased. Despite the higher number of sales, more homes were added to the market in March than were sold.

Figure 1 below shows the overall inventory of homes on the market.

Figure 2 shows the balance between homes sold each month, and the net of homes added or withdrawn each month (so, if more homes are added to the market than are withdrawn or sold, the number will be positive – see below for more detailed methodology).

While the fact that March sales numbers are increasing is undoubtedly a positive sign, the time series shown in Figure 2 does make one at least ponder whether the market is currently capable of clearing itself of inventory without paying people to buy homes (i.e., the homebuyer tax credit currently in place).  Most of our traction in working down inventory levels came in the late summer/fall of last year when home sales were spurred by the threat that the tax credits were going to expire.  Before and after that period, the addition of new inventory for sale usually outpaced sales, keeping inventory levels flat or rising.

This dynamic is being driven by the significant amount of “pent-up supply” in the market right now, that is, the pool of homeowners who have wanted to sell their homes in the past three years but, because of market conditions, either didn’t try or were unsuccessful.  Our last estimates of the size of this group of homeowners were that 8% of homeowners indicated that they were very likely to try to sell their homes in the next twelve months if they saw signs of improvement in their local markets.  These sidelined sellers closely watch the market for signs of a possible turnaround and rush in if there’s a hint of good news.

We’ll very likely see another mini-frenzy in home sales as we approach June (when the current tax credits are set to expire), although I doubt the boost will be as large as we saw last fall.  The ability of this purchased demand to push inventory levels down will be challenged by the flow of new listings into the inventory pool, something that happens each spring and summer.

It will be bad if we don’t make much headway in pushing down inventory levels through June, because we will undoubtedly see a reduction in home sales on a monthly basis in July and August (the “payback” of the tax credit seen from shifting demand that would have occurred in those months forward into the pre-July period).  This mid-summer drop-off will likely increase inventory levels so, if we haven’t been successful in pushing them down before then, we’ll likely end up with more inventory on the market than we have now, even after what is likely to be a robust homebuyer season in the spring and summer.

A few more details about how we arrived at the numbers in Figure 2: The formula used to arrive at the net number of homes added or withdrawn was:

March inventory – February inventory + Number of homes sold in March

If no new homes were added or withdrawn from the inventory in a given month, then the difference between the inventory levels in March and February would exactly equal the number of home sales in the current month and this net number would equal zero.

Additionally, all statistics used in this analysis were from the National Association of Realtors March existing-home sales report.

Dr. Stan Humphries is a real estate economist and real estate expert for Zillow. Stan is in charge of the data and analytics team at Zillow, which develops housing market data for most major metropolitan statistical areas in the U.S., and provides economic research for current real estate market conditions. He helped create the algorithms for the popular Zestimate® home value and the Zillow Home Value Index (ZHVI).

About the Author

Stan is Zillow's Chief Economist. To learn more about Stan, click here.

  • John

    Home prices are still to high compared to inflation adjusted prices of 20th century. Yes, homes of today are better and bigger compared to 50 years ago. But due to technological improvements, the cost of a home should be going down in real dollars. Thus the last 20 years of price jump is probably not justified. Given the excessive debt that has accumulated in our economy, it will take a long time before prices advance again. It should be 8-10 years of deflationary period to reset debt levels and create demand for new homes. It is still too early to buy.

  • David Losh

    This is actually the last week of being able to use the tax credit, then you need to close by 6/30/2010. I expect a lot of transactions to fail as we get closer to closing. In my opinion banks are less inclined to make loans knowing that the Securities they create with these Notes will have to perform. We are going to see a lot more nasty name calling before the devalued Securities market works it’s way out.

    Remember, bad news is good news for Real Estate. As the Real Estate market gets more desperate the need for a qualified, level headed, Real Estate agent will be more important. Lenders will need to know how to get a loan through Under Writing. We all will have to be better than we were.

    Properties will have to show a tangible value and we will hear more phrase about obsolescence, deferred maintenance, or worthless improvements. The game will be a lot tighter, and the people who don’t adapt will have to find other things to do.

  • Homes for Sale, Real Estate for Sale, Condos for Sale

    I agree with John. It will take some significant time to reset debt levels, so be patient.

  • Gainesville real estate

    I think demand is soft and will pick up the next 12 months. There are still people waiting on the sideline to buy, but are still overwhelmed by fear of the economy. All the great housing deals are long gone – now there are just good deals.

  • Pearl District Condos for Sale

    I think that we have 2 more years of foreclosures =(

  • Insurance

    I’m not sure how long, but surely it will need times to recover

  • DebtFree

    There are 2 classes of seller today: those with equity, and those without.

    Many who bought near the peak and have their homes listed for sale today are not sellers at all, since for them to actually “sell” requires them writing a check for $100,000 or more to close the deal. Just about zero percent of these sellers can actually sell.

    Then there is the neighbor to the above seller, who has lived in the house for 20-30 years, has significant equity, and can keep dropping the asking price until a buyer materializes. These are essentially the only sellers in the marketplace today, and a nightmare for the first type of seller.

  • Debra Sinick

    The trends you describe fit the Seattle-eastside market to a “T.” Sales activity in the closer in areas of the eastside has been hopping, with double and triple digit increases over the same months in 2009.

    However, there’s been a steady increase in homes for sale all over King County (which includes Seattle) since the first week of the year. The year started with 9726 homes in King County for sale and we’re now up to 13,516. We’re only 345 homes behind the peak of 2009, which happened in July of last year.

    Summer tends to be a slower time for real estate sales since many people want to be out playing in the sun. Believe it or not, Seattle is gorgeous, sunny, and dry then!

  • Billyjo

    While some areas will make some gains as they our economy makes some minor recovery, long term it is difficult for me to imagine the overall market ever reaching anything near previous levels. The subprime lending which artificially pushed everything up will never be repeated. Many people benefited from the subprimes and it drove much of our economy as consumers used home equity as cash. We likely would have seen this recession occur sooner if it had not been for this. We will bump along with minor ups and downs as boomers, whos numbers were a major factor fueling housing demand over the last 50 years, downsize and move to retirement communities nursing homes and pass away. The rapidly growing aging population will put unprecidented demaands on future health care. Looming tax increases at all levels will put further constraints on housing prices. Global competition will continue to erode our nations economic position over time. While we will perhaps experience some positive economic periods they will be small in comparison to the growth we have come to expect. Enjoy what positive news you can find and get used to the new reality!

  • Arizona Homes For Sale

    I agree with you john nice post, Our market will take time to recover :)

  • Denton Texas Homes for Sale

    Yeah it is going to take time to recover but it is getting better in Texas for sure.

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  • Houston homes

    Great Post, the research tells me it’s best to have a pre-approved buyer than a listing in today’s market.

    I’d usually prefer listings, however them just sitting there doesn’t do anybody any good.

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