About the Tight Inventory in the DC Metro Area...

Considering the importance supply and demand have played in the DC Metro market's recovery, our pals over at UrbanTurf asked us for our predictions on inventory levels through the rest of this year.  You can read the UrbanTurf post here, but in a nutshell: The trends over the last 4-5 months of double-digit year-over-year gains in new listings appear to be slowing down the inventory free-fall and has lead us to predict the area might finally see an easing of the inventory pinch later this year. 

Here's the chart we provided UrbanTurf to complement our analysis:

"JD", a commenter on the UrbanTurf post, asked a good question about our analysis, and we felt it best to respond here on our blog (so we can include a few more charts to illustrate our thinking on this). 

JD's comment:

"Can you describe the data that’s leading you to the conclusion that inventory will grow modestly in the near term? Just trying to understand why we wouldn’t see a rush of sellers to the market pretty quickly, now that word is out that prices have recovered. It would seem to me that current homeowners have refrained from selling their properties over the last few years (“repressed supply”) because they believed they were underwater due to the downturn.  Now that folks understand they’re not underwater, wouldn’t this repressed supply come to market quickly? Why wouldn’t we see a rapid return to more normalized listing levels quickly in the face of dramatic price growth, a clear seller’s market, falling rents (lower returns to holding properties), and rising interest rates?"

Our response:

While the gains in new listing activity over the past four months are significant (as we've outlined), the reason inventory levels will only grow at modest levels throughout the fall (if at all) is they are being countered by significant year-over-year gains in sales. Due to many of the same reasons outlined by JD on why sellers are coming off the sidelines, buyers are entering the game as well.  Overall inventory growth will likely be modest as the inventory-easing impact of new listing gains is getting neutralized by the uptick in sales.

Here we chart a longer view of the annual gains/losses in sales and new listings, with inventory plotted as well:

While this is only showing July activity, it pretty well represents the trends since 2001.  Note where the year-over-year changes start to diverge between sales (moving down) and new listings (moving up) in 2005. The supply buildup has begin. In July 2006, sales activity has plummeted even further while new listing activity is flat. At that point, the amount of supply has doubled compared to the previous year.  In the recovery phase, year-over-year gains in sales coupled with continuous declines in new listings returned the supply level back to near the pre-Bubble tally.  Finally in July 2013, we see year-over-year gains in both new listings and sales, but with listing activity outpacing the sales gains.  This is why the (necessary) inventory free-fall has flattened out and the reason why we're predicting a (modest) gain in supply possibly by year's end.