California’s supply of previously-owned single family residences (SFRs) sank to a five-year low of 3.8 months in January 2010, down from 5.8 months a year ago. When compared to the January 2008 supply of 16.6 months, this particular statistic points to a California real estate recovery. Or does it? The “months of supply” is merely a “listings-to-sales ratio” for the month in question.  This ratio is defined as the number of months it would take to sell the entire inventory, assuming no other listings were added to the inventory during the ensuing months.

first tuesday take: The real estate trade group reporting this mathematical fact has once again cherry-picked the only optimistic statistic available and presented it without placing it in context. Yes, the inventory of previously owned homes is selling more quickly, the mathematical part. But this report fails to look forward to the months following January’s listing–to–sales ratio and account for numerous market conditions which will contribute to the second aspect of the months of supply – the assumption that no additional properties will be placed on the market during the following months.

One such condition is the aberration of widespread reluctance among positive-equity homeowners to list their homes in a downwardly priced market. Owners are holding on to their positive equity and waiting to list after a solid bottom is found and prices begin rising. Thus, to take this one statistic and jump to a sunny conclusion implicitly about the future is both simplistic and wrong.

REOs are another unaccounted for portion of the sales inventory, the absence of which is distorting inventory numbers downward.  That will change as delinquent mortgages are eventually going to have to be foreclosed (hundreds of thousands have been delayed by the rogue “extend and pretend” modification programs) and dumped on the MLS markets as REO inventory. Homeowners and lenders both know they’ll get more bang for their buck in a real estate market with an upward trajectory—if they can hang on until businesses get confidence in the future and start adding jobs.

Readers must also consider the federal and state housing subsidies provided as tax credits. These artificial incentives are designed to flush out inventory and sustain or increase prices, which they do.  Further, the Fed’s subsidy of mortgage rates, achieved by pumping massive amounts of funds into the mortgage bond market, is a synthetic discount of 1.5 – 2.0 points below open market rates—put in place to sustain or increase prices, which it has.

For a clear dose of realism about tomorrow’s action for brokers and agents, not last month’s math on a listings-to-sales ratio, subtract the federal subsidies (in the form of tax credits for first-time buyers and super-low interest rates) and add the unlisted REOs. The result is a California real estate market unable to hold the current price levels without a lot more government intervention. And that means the real estate market has yet to recover.

Government subsidies, while intended as a kick start for the real estate market, if continued are going to lengthen the recession and delay the actual recovery. The sooner we hit bottom, the sooner the recovery will start – neither has occurred.  Brokers and agents make money while prices are going down, and they make money when they are moving up.  Any kind of movement brings buyers into the real estate market.  The present stagnation in sales and prices, and the continued stagnation facing us by further government intervention will reduce sales numbers in 2010, and thus cut into the earnings of brokers and agents. Keep an eye on what the government does, and budget accordingly.  Ignore it at your peril. [For more information on trends to look for in housing, see the January 2010 first tuesday Market Chart, Home sales volume and price peaks; also for more information on how speculators distort inventories, see the January 2010 first tuesday article, Homebuyer beware: the real estate game lacks fair play.]

Re: “California’s Home Inventory Shrinks to 5-Year Low,” from the Wall Street Journal