Is there a housing Glut?

In order to understand the condition of the housing market it is important to understand some of the more common measures and indices used by economists who track its performance.  So, from time to time I will explain some of the more frequently cited indices.  A popular index used by the California Association of Realtors (C.A.R.) and often cited by The Los Angeles Times and radio talk show hosts is the Unsold Inventory Index (“UII”).  UII measures how fast housing inventory is being absorbed by homebuyers.  

Based on the number of homes being sold per month and the number of homes actively listed on the multiple listing service (“MLS”), the UII indicates how many months it would take to sell all of the homes currently listed.  For example, if there are 100,000 homes for sale and 10,000 homes are being sold per month, the UII is 10. An escalating UII means the market is weakening because housing inventory is building; a falling UII means home sales are outpacing new listings as demand increases.  Dramatic movements in the UII can be the result of a sudden surge or contraction of the housing supply or a sudden surge or contraction of the demand for housing.  Markets crash when inventory sores at the same time that demand evaporates. 

Every month C.A.R. tabulates the number of houses that sold the previous month and the number of homes that were active at the end of the month regardless of whether they were listed that month. So, even if a property was listed three months ago it will be counted as long as it was active at the end of the previous month.  Listings that have expired or for whatever reason were removed from the MLS will not be counted. C.A.R.’s Unsold Inventory Index for existing, single-family detached homes as of October 2008 was 5.9 months, compared with 15.2 months for the same period a year ago.  Historically, the average is about 7 months.  Next week I will explain why there is still a housing crisis even though there is apparently no housing glut.