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Inventories of existing homes for sale as measured by months supply broke an all-time record in July.

Inventories Soar to Critical Levels

The record 25.5 percent drop in July home sales reported yesterday by the National Associaiton of Realtors contributed to a record level of unsold inventories of homes for sale that could have a more serious long term impact on housing markets than the sales collapse.

Inventories of existing homes for sale as measured by months supply broke an all-time record in July. Months supply reports the number of months it would take for all the current homes for sale on the market to sell, given the current monthly sales volume. Four to five months of supply is average:

Months of supply increased to 12.5 months in July from 8.9 months in June. This level of supply will put additional downward pressure on house prices, which slowly increased nationwide during the first half of the year. Total housing inventory at the end of July increased 2.5 percent to 3.98 million existing homes available for sale.

The previous all time record high for months supply was 11.2 months of supply in 2008 and the all-time record high number of homes for sale in America was 4.58 million in July 2008. In the third quarter of 2008, the Case-Shiller National Price Index fell a record 16.6 percent.

“Even with sales pausing for a few months, annual sales are expected to reach 5 million in 2010 because of healthy activity in the first half of the year. To place in perspective, annual sales averaged 4.9 million in the past 20 years, and 4.4 million over the past 30 years,” said NAR’s Lawrence Yun yesterday. “There is not likely to be any measurable change in home prices going forward,” he told the New York Times.

However, others weren’t as sanguine.

“”You end up in a home-price-depreciation death spiral,” Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York told the Wall Street Journal. “It’s not clear there’s enough demand to handle this overhang without another round of price declines.”

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