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RISMEDIA, May 3, 2010—We got some encouraging news last week about March existing-home sales increasing almost 7% from their levels in February, which leaves many of us wondering how soft the housing market is.

Unfortunately, a deeper look at the numbers from the National Association of Realtors reveals that inventory of for-sale homes also increased. Despite the higher number of sales, more homes were added to the market in March than were sold.

This figure shows the overall inventory of homes on the market. A second figure shows the balance between homes sold each month, and the net of homes added or withdrawn each month (so, if more homes are added to the market than are withdrawn or sold, the number will be positive – see below for more detailed methodology).

While the fact that March sales numbers are increasing is undoubtedly a positive sign, the time series shown in the second figure does make one at least ponder whether the market is currently capable of clearing itself of inventory without paying people to buy homes (i.e., the home buyer tax credit. Most of our traction in working down inventory levels came in the late summer/fall of last year when home sales were spurred by the threat that the tax credits were going to expire. Before and after that period, the addition of new inventory for sale usually outpaced sales, keeping inventory levels flat or rising.

This dynamic is being driven by the significant amount of “pent-up supply” in the market right now, that is, the pool of homeowners who have wanted to sell their homes in the past three years but, because of market conditions, either didn’t try or were unsuccessful. Our last estimates of the size of this group of homeowners were that 8% of homeowners indicated they were very likely to try to sell their homes in the next twelve months if they saw signs of improvement in their local markets. These sidelined sellers closely watch the market for signs of a possible turnaround and rush in if there’s a hint of good news.

We’ll very likely see another mini-frenzy in home sales as we approach June (when the current tax credits are set to expire), although I doubt the boost will be as large as we saw last fall. The ability of this purchased demand to push inventory levels down will be challenged by the flow of new listings into the inventory pool, something that happens each spring and summer.

It will be bad if we don’t make much headway in pushing down inventory levels through June, because we will undoubtedly see a reduction in home sales on a monthly basis in July and August (the “payback” of the tax credit seen from shifting demand that would have occurred in those months forward into the pre-July period). This mid-summer drop-off will likely increase inventory levels so, if we haven’t been successful in pushing them down before then, we’ll likely end up with more inventory on the market than we have now, even after what is likely to be a robust home buyer season in the spring and summer.

A few more details about how we arrived at the numbers in Figure 2: The formula used to arrive at the net number of homes added or withdrawn was: March inventory – February inventory + Number of homes sold in March. If no new homes were added or withdrawn from the inventory in a given month, then the difference between the inventory levels in March and February would equal the number of home sales in the current month and this net number would equal zero. Additionally, all statistics used in this analysis were from the National Association of Realtors March existing-home sales report.