Home Inventories Falling

Existing-home sales fell 3.0% in March, after posting a 4.9% increase in February, which was the largest percentage increase since July 2003.

Sales ran at a 4.57 million annualized pace in March, down from 4.71 million in February and the nearly 12-year low of 4.49 million set in January. March was the fifth month when sales hovered near the current level, suggesting stabilization.

Condo sales, which are included in the overall tally, decreased 4.1% in March after an 11.4% gain in February. Condo sales have been boosted by price discounts and by prospective homeowners shifting to smaller dwellings.

Continuing a theme, inventories decreased in March, to 3.737 million from 3.798 million in February. The decrease is important, because it occurred at a time when "phantom" inventory tends to surface, with hopeful sellers seeking to take advantage of what is the busiest time of the year for home sales. Inventories are now 838,000 below the peak, which was set in July (4.575 million). Inventories of unsold new homes have fallen at an even faster pace and are now near normal levels from an historical perspective.

Progress on the inventory front is likely to continue this year for a number of reasons, but the most understated and least talked-about reason is the one that is most important: Builders have stopped building and the population is still growing; people need shelter and will occupy empty space either by buying or renting.

The main thing is that the inventory of vacant homes will decrease, and cash flow will be generated, and the cash flow will reduce foreclosures. There is also the possibility that sales will increase because of government incentives to purchase a home ($8,000 first-time homebuyer tax credit) and because of efforts to boost affordability (the Fed's MBS purchase program) and those geared toward unclogging the financial system (for example, the PPIP). In and of itself the signs of stabilization are likely to draw in fence-sitters, particularly given the record level of affordability.