Everything You Need to Know About the Housing Market

December's housing numbers disappointed. Here are four charts to help you wrap your head around what's really happening in real estate and why Pulte Homes, Toll Brothers, and others need not worry.

Jan 29, 2014 at 7:30AM


This week, the Commerce Department released its December housing market report, and the numbers widely disappointed market observers. Newly constructed single-family home sales declined 7% from November, coming in at a seasonally adjusted 414,000 homes.

What does this report mean to you? As always, monthly reports should always be taken with a grain of salt; one month does not make a trend. But diving into these charts will help you read the tea leaves of where the housing market is, and more importantly, where it's going.

The 10-year trend: New home sales
Let's start by taking a step back and observing the performance of new-home sales over the past 10 years. The immediate observation is just how outrageous sales were back in 2004-2006. But looking at the trend over the past four to five years shows that December's numbers are not materially outside the pattern. The bullish trend beginning in 2011 still seems to be intact. 

US New Single Family Houses Sold Chart

Sales are relative. Let's look at inventory.
To evaluate the number of sales, we must also consider the inventory available on the market. Sales are an indicator of demand; inventory is supply.

In this chart, we can clearly see a strong seasonality to inventory in the housing market (this seasonality has been adjusted out of the preceding sales chart). But even with the cyclical gyrations, the long-term trend is still obvious. Supply is declining, but it could be nearing a stable level.

US Existing Home Inventory Chart

We have established that sales, from a trend perspective, are stable and slowly increasing. Inventory is declining but may be nearing a stable level. What does this mean for us as investors and market observers?

Understanding the intersection of supply and demand
When evaluating the real estate market, it's not enough to review sales and inventory independently. Understanding how these indicators interact is the best way to truly assess the direction of the market -- we need to find where supply and demand intersect. 

To do that, we can view a ratio called the "months' supply of inventory." If there is one ratio to understand in real estate, this is it.

In a stable market, this metric for new homes will be somewhere between four to nine months. This means that with current sales and current inventory, the market currently has enough houses to last four to nine months.

If this number moves lower, it indicates that inventory is low and that prices will likely rise unless there is an influx of new homes. If the number moves higher, it indicates there is an oversupply based on demand, and prices will fall. 

The real scale of the real estate meltdown can be seen in this chart, but what's more significant today is that the ratio of supply and demand remains in the range of a stable market. This is a great sign for builders -- it means prices will remain stable and that current market dynamics should continue. This is a great sign heading into the spring selling season.

US Months Supply of New Single Family Houses Chart

Recent history tells the story for homebuilder stocks
Bringing it all together, this final chart shows the stock price of two major homebuilders -- PulteGroup (NYSE:PHM) and Toll Brothers (NYSE:TOL)

US New Single Family Houses Sold Chart

Bringing these charts all together, we show that the long-term trends remain intact, supply and demand are still balanced, and homebuilder stock prices don't really correlate to short-term movements in the housing market. And so, we can conclude that for investors in residential single-family real estate or in homebuilders, the weak December numbers are, well, irrelevant.

An investment in real estate will last forever. So will an investment in these 3 stocks
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 


Fool contributor Jay Jenkins and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers