We are still early into 2013, but the data releases so far are extending the trends established in 2012.

Consider inventory: The numbers continue to drop. According to data provider Movoto Real Estate, inventory dropped 9%, or by 9.551 homes, month over month in December. The latest monthly drop means inventory levels ended 2012 27% lower than where they began.

Falling inventory has been a mixed blessing: On the one hand, less supply has helped lift prices higher. (The paradigm of falling supply/rising demand will always do that.) On the other hand, lower inventory has truncated sales activity. It's obvious to say that we all could have been busier if there were more homes for sale.

Inventory has been squeezed for two reasons: (1) Many homeowners remain underwater, so they're in no position to sell; and (2) the rising price trend has kept properties off the market, because potential sellers believe a higher price is forthcoming.

Both these situations will rectify themselves over time: Rising prices coupled with continued mortgage amortization will lift many underwater homeowners above water. Rising prices will also reach an action point for more homeowners, where the price finally justifies putting the home on the market. In short, we expect inventory levels to rise as the year progresses.

In the meantime, there is little reason for anyone interested in buying a home not to buy. Despite steady price increases, homes remain very affordable. The NAR's Housing Affordability Index will likely have ended 2012 at a record high. 2013 is also expected to be a high-affordability year (though affordability is expected to drop as the year progresses).

In addition, rent payments and mortgage payments have reached a multi-year gap, with rent payments becoming much less attractive when compared to mortgage payments.

We thought it was interesting that the NAR mentioned in its release on housing affordability that “a more sensible lending environment that makes it easier for other financially qualified buyers to get a mortgage would allow many more households to enter the market, boosting home sales as much as 10% to 15%.”

Of course, we agree. We also think that as the economy improves, the lending environment will become more “sensible.” The downside is a more-sensible lending environment will likely lead to a higher-rate environment. In fact, 2013 has been marked by higher mortgage rates. We're not surprised given the recent surge in the 10-year U.S. Treasury note yield.

Courtesy of Jessica Regan.

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