The last shred of cheery housing news of 2010 has passed, and it was ugly.  As expected, housing sales jumped in April as naive new buyers obediently accessed the Government's $8,000 tax credit and purchased 49% of homes sold during the month.

The hapless do not grasp that their windfall will cost them dearly as prices fall, leveraged equity losses compound and a large number of foreclosures result.  Just because something is free does not mean it has value.  This is especially true when the act of beneficial altruism originates from the Government.

Housing sales rose in April to a rate of 5.77 million annually, up from 5.01 million two months earlier.  But the real news is that during this frothy period of transactional activity, the pace of increasing inventory overwhelmed artificially high sales.

Supply and Demand

In April inventory increased by more than 400,000 units in one month.  Inventory rose 11.5% to 4.04 million representing an 8.4 month supply.  The supply backlog is rising as individuals and banks flood the market in hopeful anticipation of the summer buying season.

During April 2008 inventory set a post-Bubble record at 11.2 months of supply.  This backlog has been massaged lower since by Government initiatives designed to delay and obscure deteriorating housing fundamentals.

A year ago the April inventory increase was 289,000 followed by a 86,000 unit contraction in May.  But this year inventories will continue to expand in May, even as housing sales collapse following expiration of the $8,000 tax credit. 

Last year the Government's housing stimulus had distorted the market to an extent that prices were actually rising and a hopeful narrative of recovery could be argued.  Today housing prices are falling, stimulus is fading, foreclosures are setting new records, and inventories are overwhelming the scant few buyers remaining. 

Should inventory increase by another 400,000 during the remainder of the year, I believe we will set a post-Bubble record for months of supply on the market.  Housing prices do not respond well to high, rising or record inventory. 

A 400,000 unit increase in houses for sale combined with a decline in the annual pace of transactions to 4.7 million would result in 11.3 months of inventory.  This new benchmark could arrive in the next few months depending on steepness of the sales collapse.  Summer buyers might delay the record until fall, but as banks are forced to rationalize foreclosures, and the general population comes to understand how dismal the housing market really is, a record backlog of units for sale will follow.