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Back in July I put up a chart showing that the number of months’ worth of housing inventory was highly correlated to home price changes. That same chart suggested that, in accordance with a longstanding rule of thumb, six months’ of inventory seemed to mark the line between upward and downward pressure on home prices.
Below is an update of that chart. A few notes: first, remember that the price change is inverted so that a higher red line actually denotes lower prices. This is done to help visualize the correlation between inventory and prices (the original article explains the chart in more depth). Second, the past two months’ price changes are not actual Case-Shiller numbers — which aren’t out yet — but rather my estimate of what those numbers will be based on the methodology described here. And finally, I should note that I switched to using pending sales rather than closed sales to calculate months of inventory, so the the orange line looks slightly different than in the original post (mostly in that it tends to lead the price changes a little more).
What the updated graph shows is that this relationship has continued to work. Months of inventory nudged up to and eventually surpassed the six month mark, and sure enough, home prices started dropping right around that same time. It seems likely that price declines will continue unless supply tightens up in comparison to demand.
Please contact Rich Toscano at email@example.com and follow him on Twitter at http://twitter.com/richtoscano.