Calculating Risk with Home Values

The economic research blog called “Calculated Risk” just completed a fascinating study on home prices.

Specifically, they looked at the correlation between home price growth and inventory.

They used price data from the Case-Shiller Home Price Index and inventory data from the National Association of Realtors.

No surprise, they found that the lower the inventory the higher the home price growth.  Also no surprise, as inventory goes up, price growth slows down.

This all correlates with simple economic rules of supply and demand.

The interesting part of their research is this:  at a certain level of inventory, prices have the potential to go down.

That level, according to their research, is six months of inventory.

That means, prices don’t have a chance of decreasing in a market until there is at least 6 months of inventory available for sale.

To put that in perspective, today there is two weeks of inventory on the market along Colorado’s Front Range.

So, there would need to be 12 times the amount of homes for sale on the market for prices to even have a chance to go down.