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Sales Skyrocketed! So Why Is Supply INCREASING?

There was great news reported yesterday by the National Association of Realtors (NAR). The Existing Homes Sales Report showed a 7.6% increase in sales over last month and a whopping 22.8% increase over April 2009. This is fantastic news as it proves the tax credit, which expired at the end of April, did increase sales in the first portion of the year. The unanswered question is – Where will the market go from here?

There are some who believe that the tax credit just dragged forward demand from later in the year. The latest Mortgage Bankers Association’s Weekly Application Survey quoted Michael Fratantoni, MBA’s Vice President of Research and Economics saying:

The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season.

Paul Jackson, the editor of Housing Wire, in an article yesterday went even further:

I’d suggest the demand pull here might go well beyond just the spring buying season, given the fact that homes generally are “sticky” assets to begin with and also represent a substantial investment for most households. It’s likely that the program pulled purchase demand forward for much of this year, and perhaps even reaching into next.

I believe both housing experts have a valid point. However, I believe the biggest challenge is not whether demand will remain consistent. Homes will continue sell for all the same reasons that houses sell every year. People will move, get married (and divorced), have children and retire to a different climate. The question isn’t whether homes will sell. The question is at what price.

If demand remains relatively consistent, we have to look at supply for the answer to that question. And we are already seeing evidence the inventory of homes coming to the market is outpacing the large increases in demand we have experienced.

The Zillow survey that showed that millions of homes could be coming to market based on a pent-up selling demand created by the weakness in the market over the last few years.  We have previously reported on the increase of foreclosures beginning to come to market.  These numbers are beginning to show up in the data being currently reported.

Calculated Risk has a great graph showing the increase in housing inventories even with this surge in homes sales:

The red line represents the months’ supply of homes for sale and the blue line represents the year-over-year differences. Calculated Risk went on to say:

Inventory increased 2.7% (YoY)  in April, the first YoY increase since 2008…This increase in the inventory is especially concerning because the reported inventory is already historically very high, and the 8.4 months of supply in April is well above normal… Perhaps this was an especially large surge in inventory as sellers tried to take advantage of the tax credit, but it is also possible that we will see close to double digit months of supply later this year.

What does this mean to you?

Supply is already beginning to increase even with a surge in home sales. An increase of supply will soften prices unless there is another dramatic uptick in purchases. No one is predicting an increase in demand. If you are looking to sell at the best price, the time is now!

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