An Analysis of the Low Unsold Housing Index

     The most recent real estate reports for California markets continue to identify low inventory as the stand-out characteristic.  Historically the turnover from spring to summer brings a seasonal surge of listing and sales activity.  Yet in 2012…. Not so much.  The California Association of Realtors recently reported that single family home sales [SFR] were up 8.5 % across the state from last year but down 8.6% from May levels.  C.A.R. Vice President and Chief Economist Leslie Appleton-Young attributes much of this downward month to month sales activity to the tightening of distressed and foreclosure units available for sale.  Most analysts share the view that this low seasonal inventory, coupled with high demand sustained by low interest rates and a strengthened job market, has concocted a seller’s market dominated by multiple offer situations and bidding wars which drive up home prices.  June median home prices substantiate this reasoning, as the reported figures for the third consecutive month were above the $300,000 mark, ending June at $320,540, its highest mark since December 2010.

    But just how low is inventory?  One of the best measurements of inventory and overall health of the housing market lies in the Unsold Housing Index, calculated by determining how many months it would take to sell homes currently on the market at the current rate of home sales.  The Unsold Index is simply calculated by dividing the available homes by the number of homes sold. A three month Inventory in the Unsold Index indicates that at the current rate of sales it will take three months to completely deplete the inventory, assuming that no new listings are generated.  A reported index of 7 is commonly regarded as a healthy market.  And with the current California Unsold Index at 3.5 months, there is no debate that we are currently experiencing a tightened housing market, especially when seasonal adjustments are factored into the equation.

     If we take the above study a step further, perhaps we can diagnose what type of sale is contributing most to this downward inventory trend?  As the below chart will indicate, pulled from the C.A.R. website, equity sales continue their year-to-year and month-to-month climb, while distressed sales, more specifically REOs, continue on a downward pace. 

Type of Sale	June 2011	May 2012	June 2012
Equity Sales	50.5%	56.0%	58.0%
Total Distressed Sales	49.5%	44.0%	42.0%
REOs	29.2%	22.6%	20.2%
Short Sales	20.0%	21.1%	21.4%
Other Distressed Sales (Not Specified)	0.2%	0.3%	0.4%
All Sales	100.0%	100.0%	100.0%

     With the average distressed sale fetching lesser purchase prices than equity sales, such a trend helps partly explain the current price increases.  With inventory levels so low, the next big question to ask ourselves, why this continued percentage drop in REOs share in the marketplace?  Are distressed homeowners finding solutions to keep their homes without having to put their properties up for sale to avoid foreclosure?  Are beneficiaries taking more time to both process foreclosures and to resell foreclosed homes?    

     Well, as statisticians love to say, “the numbers don’t lie”.  As the graph below illustrates, pulled from Foreclosureradar.com :

… both the average time to foreclose and the time it takes beneficiaries to resell their REOs have increased since the start of 2012.  Both trends can help explain why there has been a recent decline in REO sales and overall sales.   It’s certainly possible that lenders are extending these foreclosure-related processes to add fuel to the existing price increase trend.  But it could also be the extreme back-log of delinquent accounts and the limited resources lenders have to process all the homeowner inquires that is causing these lender delays.  My hunch… it’s a combination of both.  Regardless how you slice it, C.A.R. President LeFrancis Arnold explains that the decline in REO housing supply is “putting upward pressure on bank-owned home prices, with the median price of REO properties showing a double-digit year-over-year gain of 11 percent in June.”