With Inventory Scarce, Home Prices Bounced Back in 2012

I thought I’d pop back in for a look back on how the San Diego housing market fared in 2012 …

In short, it fared well.  Resale home prices, as measured by the median price per square foot, rose for the year by about 13 percent for detached homes, 18 percent for attached homes and 14 percent in aggregate.

Here is a graph of the median price per square foot starting at the post-crash trough in March 2009.  The solid upward progress during 2012 put them right back at their highest levels since the bubble burst:

Here, for perspective, is a look at prices since the bubble peak in late 2005:

This year’s rising prices were foreshadowed by the number of months’ worth of inventory, as shown in the following graph: 

This one should be familiar to those who’ve kept up on my (very infrequent) posts over the past year, so I will just explain it briefly. The blue line shows the number of months’ worth of inventory of San Diego homes. This statistic is cool because it combines supply and demand into one figure, and tells us how many months it would take to sell current inventory at the current pace of sales. 

The red line is the annualized change in home prices using the Case-Shiller index (or my estimate thereof for the more recent months).  The months of inventory figure is inverted so that excessive inventory appears low on the graph — this is done to make the visual relationship more apparent.  Clearly, there is a pretty good predictive relationship here, as inventory is high (low on the graph) prices tend to drop and vice-versa.  A more in-depth discussion, including some thoughts on why the relationship has occasionally broken down, can be found here. 

With that background behind us: Months of inventory dropped hard early in 2012, and stayed there.

The decrease was not primarily driven by increased sales — as the following graph shows, sales volume was healthy enough but not far out of line with what we’ve seen in recent years:

Instead, it was driven by a continuous decline in the number of homes per sale:

Here’s a look at that same data — number of resale homes on the market — but in a continuous line instead of split up by year, so that the trend is more obvious:

That plummeting inventory is primarily what led to the severe drop in the months-of-inventory figure:

The decline may not seem severe on that second chart due to the scale required to show the housing crash-era glut, so perhaps a percent change will get the point across better.  Between December 2011 and December 2012, months of inventory dropped by 38 percent (with virtually all of that decrease taking place in the first three months of 2012).

Looking forward, months of inventory is still scraping the bottom of the barrel.  Perhaps this will change at some point (in fact, it almost certainly will), but it hasn’t yet.  For as long as this continues to be the case, expect prices to continue reacting as they have been. 

Rich Toscano is a financial adviser with Pacific Capital Associates*.  He can be contacted at rtoscano@pcasd.com.

Disclosure: Voice of San Diego members and supporters may be mentioned or have a stake in the stories we cover. For a complete list of our contributors, click here.