Inventory of Unsold Homes Suggests that San Francisco Market Will Remain Weak

The inventory of unsold homes has historically been a good predicter of near term housing market performance. I addressed this topic in an earlier blog posting. For California as a whole, the historical relationship seems to have broken down recently. The breakdown probably resulted from banks dumping foreclosed homes onto the market. (I'll address this shortly, in another blog posting.) San Francisco has had relatively few foreclosures, however, so the historical relationship has held up pretty well.

Take a look at the chart, below, which compares the beginning-of-year inventory of unsold homes in San Francisco to the change in median price during that same year.

Inventory is stated as the number of months required to sell the current stock of for-sale housing, assuming that selling activity remains at current levels. I plotted it using an inverted scale in order to highlight the correlation with price changes.

Real estate practitioners often assert that the housing market is "in balance" when there is six months worth of inventory. The chart suggests, however, that the equilibrium level of inventory for San Francisco may be less than six months. Since 1997 (the beginning of my data series), the average inventory in San Francisco has been only 3.6 months, compared to 5.0 months for California as a whole. And although San Francisco began 2008 with just over six months worth of inventory, prices fell almost 20% during the year.

The San Francisco market had 5.8 months worth of inventory at the beginning 2009. That represents only a modest improvement over 2008. If I had to make a prediction based on this indicator alone, I'd say that 2009 is shaping up to be another weak year for the San Francisco housing market.