With the Existing Home Sales report for December 2007 due out Thursday, now is a good time to answer this reader question, “What’s the definition of a months supply for existing home sales?” The report, released every month by the National Association of Realtors, gives a top line number of the seasonally adjusted annual unit sales. It also includes reports on prices and inventories. So, there are a few other terms that are worth defining while we’re at it.
Seasonally adjusted is one of those terms we hear in a lot of economic reports that may sound intimidating, but is really exactly what it sounds like. Home sales vary a lot by season, due to weather, school and work vacation schedules, holidays, the timing of tax refunds and other factors. Spring, when the weather is nice, potential buyers have tax refund checks in hand and school is still in session so vacations and holidays don’t interfere is prime selling season in most parts of the country. Summers tend to slow down a bit with hot weather and family vacations. Winter, with holidays and cold weather is generally the worst part of the year. (An informal survey I did in our local market a few years ago showed a drop in both number of sales and prices of around 8-12% every year for the December-February season compared to the previous June peak.) Seasonal adjustment just means that a formula has been applied, based on previous years seasonal variations, to turn one month’s sales figures into a meaningful annual figure.
That figure is expressed as annual “unit” sales. A unit is simply one home – that may be a single family home or a single condo or coop unit. A duplex or triplex would be two or three units.
The report includes information on inventories of existing homes. This is not an actual count of the number of homes in the country. It’s a count of the number of homes listed for sale. To put the number in context, the report always gives both the number and a reference to the number of “month’s supply”. The more month’s supply that is available, the more the situation favors buyers, while a smaller month’s supply available means a tighter supply and favors sellers. Month’s supply is another of those fairly simple things that looks daunting – it’s the seasonally adjusted annual unit sales divided by 12. Take the available inventory and divide it by a month’s supply and you’ve got the number of month’s supply available for a given month.
The report also includes information on price and gives both “median” and “average” prices. The average price is the simple mathematical average you learned in basic math – total sales dollars divided by number of sales – though it’s certainly not simple to compute with the large number of sales involved. Median is the actual midpoint. It’s the price where exactly half of homes sold for more and exactly half sold for less. Normally, that’s an important number because the sale of one really expensive home still only counts as one sale and it doesn’t move the numbers too much. The last few months, it’s cause a little problem as the “jumbo loan” market for mortgages above $417,000 dried up. Even though homes below $417,000 were still selling at about the same price, the median was pushed down simply because the number of higher priced homes dropped – so July’s “median” home was actually above the median by December and might actually be worth more than it was in July.
For the average home buyer or seller, the important things to look for in the report are your regional numbers and the long run trends. That means looking not just at this month’s report, but at several month’s reports. The month’s supply of available homes is a great number for getting a sense of where the market is heading and one of the most effective ways to use it is to put yourself in the typical seller’s shoes. How fast do you want your home sold? Many sellers expect a sale time of 60-120 days. Currently, the months available supply is running from 8 to 10 months, or about 3 times as long. Another important factor is to look at where the number is in good times (or seller’s markets). With some sellers always willing to hold out for a higher price, even in boom times the number doesn’t go much below 5 to 6 months.
Technorati Tags: existing home sales, inventory, month’s supply
