My favorite single indicator of housing market strength is the
following ratio:

This ratio is called “months of inventory,” because it measures how
many months it would take to sell the current amount of inventory at
the current sales pace. Thus it is a handy single indicator of both
supply and demand. It also happens to be very predictive of
near-term price changes (a relationship which I first learned of
from the great Bill McBride).

Getting on with the current state of affairs: the
months-of-inventory ratio (let’s called it MI for this post!) shows
that the market has cooled off quite a bit in recent months. Here’s
a graph of MI for each month over the past almost-4 years:

Up until May, MI had been cruising along at levels that are pretty
typical for recent years (although well above 2017’s level). After
that, however, it started to rise and now stands as the weakest (by
this metric) August in the past four years.

I noted that 2017 was a very tight market, with low months of
inventory. August’s MI was up 44% year over year! However, the above
graph shows that we aren’t that far above 2015 levels, and the next
graph shows that MI is still below levels it hit in 2014:

So, there’s nothing extraordinary or panic-worthy here… the market
is a good amount weaker than it was in recent times, but that’s
coming from a very hot market, so things are still very much in the
realm of normalcy at this time.

The increase in MI is coming from both sides — higher inventory,
and lower sales. Of the two, the increase in inventory is more
pronounced compared to last year… inventory is up 26% while sales
are down 13% from Auguest 2017:

Prices were accordingly pretty weak… here’s MI (inverted) vs. the
monthly price change:

And here’s the same chart zooming in on recent years, with the scale
changed to reflect the hypothesis that in the post-Redfin etc era,
there is a “new normal” for lower months of inventory (thanks to
reader gzz for that idea):

For the first time in quite a while, we may be looking at some
softness or weakening of prices. We’ll see what the typical slow
fall season brings. In the meantime, here’s prices up til now:

I suspect very strongly that mortgage rates are playing a role. Over
the past year, the 30 year mortgage rate has increased by over 80
bps. This is, relatively, a pretty huge jump given that the low was
about 3.8%… going from 3.8% to 4.6% amounts to about a 10%
increase in monthly payments. Add that to the ~5% increase in prices
over that time, and affordability has gotten a whole lot worse. The
increase in months of inventory suggests that we may finally be
nearing the affordability tipping point, where buyers can’t take it
any more.

More graphs below!