America's Big, Fat Housing Inventory


The supply of homes for sale is at a nine-year high, and housing inventories across the U.S. are swelling dangerously

Houston, you have a problem—with housing inventory. And as the number of homes for sale in the country continues to creep upward thanks to waning demand, many other major U.S. cities are dealing with the same issue.

At the current existing-home sales rate of 5.04 million units a year, it would take a full 10.5 months to sell the 4.4 million existing homes now on the market, according to data released by the National Association of Realtors (NAR) on Oct. 24. The supply of existing single-family homes was at 10.2 months in September—the highest since February, 1988. Compare that with the height of the housing boom in January, 2005, when it reached a record low 3.6 months.

Experts Disagree on the Outlook

Tighter lending standards, which are dampening sales, aren't helping housing inventories, though the NAR thinks mortgage availability is starting to improve (BusinessWeek.com, 10/24/07). "Once the pent-up demand begins to move, we'll see housing supplies begin to ease and then prices will edge up," said NAR Senior Economist Lawrence Yun in a statement issued Oct. 24.

Others aren't so optimistic. Home prices are still falling—the national medium home price is down 4.2% from a year ago, to $211,700, according to the NAR—a sure sign that demand is weak. "With prices remaining stubborn, inventories will remain relatively high," says Jonathan Smoke, president of housing market consulting firm Rating Insights.

L.A. and Environs

The housing supply is particularly bloated in Los Angeles, Chicago, and Miami—the top three on our list of the cities with the biggest housing inventories based on data from San Francisco brokerage ZipRealty (ZIPR). Tampa, Phoenix, Washington, Dallas, Boston, Sacramento, and Houston form the rest of the top 10. ZipRealty pulls inventory data—the same data available to Realtors—from multiple listing services in different metropolitan areas.

More than 100,000 homes sit on the market in the Los Angeles area, giving it the country's biggest housing inventory, up 21% from last year. And sellers are cutting prices to unload their homes—nearly half of all currently listed homes in L.A. have reduced prices, whether they've been on the market for a few weeks or for months.

The Los Angeles housing market offers "a couple different stories," says ZipRealty Chief Executive Pat Lashinsky: Although the beach city real estate markets are faring well, poor sales in valley cities including Riverside and San Bernardino are pushing up the inventory levels for the total area, Lashinsky says. Prices of homes sold were up 2.9% in the second quarter of this year in the Los Angeles-Long Beach-Santa Ana metropolitan area, while they fell 0.3% in Riverside-San Bernardino-Ontario, according to the NAR. ZipRealty says its metropolitan area definitions may include some zip codes, such as San Bernardino and Riverside, that are considered recognizable to residents as being part of a certain metro area.

Buyer's Markets

In Chicago, which has the second-highest housing inventory level in the country, the situation is a little different. Inventory has shot up 17.2% in the past year, to 82,839, even though the area did not experience the housing boom and speculation buying that led to a market correction in much of the country, with Miami and Southern California standing as prime examples. It may be that even in Chicago, buyers and sellers have become wary because of all the negative national news about real estate, Lashinsky suggests.

The same seems to be true of Dallas and Houston, where inventories are among the highest in the country but home price appreciation remains relatively strong. In the second quarter of 2007, the median home price was up 1.7% in Chicago, 1.7% in Dallas, and 1.4% in Houston, compared to a national decline of 1.5% in the same year-over-year period. These particular areas, where the economic outlook is positive and prices are still going up, may be ideal spots to look for bargains (BusinessWeek.com, 9/18/07) since they are also buyer's markets with high housing supplies.

Selling Hesitance

Housing inventory rose 15.8% in Houston in the past year, but luckily, inventory levels have fallen 2.4% in Dallas since September, 2006. Inventory in Boston is down 5.8% from a year ago. "It's a good sign," says Lashinsky. "A lot of people aware that inventory is out there are being careful about putting homes on the market right now."

Of course, some sellers will remain stubborn, but more and more seem to be setting or reducing prices to levels the market can bear. In 8 of the top 10 U.S. cities with the biggest housing inventories, at least 40% of the homes are listed at reduced prices. A percentage in the high 30s is indicative of a near-equilibrium market, according to ZipRealty.

For home buyers, this is a good thing. "Sellers need to be aware of the competition, and buyers need to realize that they definitely have a lot more ability to negotiate right now," Lashinsky says. "It's an interesting market to be involved in."

Check out the BusinessWeek.com slide show for a list of the 10 U.S. cities with the biggest housing inventories.

Roney is Real Estate writer for BusinessWeek.com.

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