The Inventory-Sales Ratio and Homebuilder Return Predictability

• Published in: The journal of real estate finance and economics Vol. 46; no. 3; pp. 397 - 423
• Main Authors: Chinloy, Peter, Wu, Zhonghua
• Format: Journal Article
• Language: English
• Published: Boston Springer US 01.04.2013; Springer Nature B.V
• Subjects: Asset pricing; Bidding; Capital gains; Competition; Construction contracts; Construction costs; Contracts; Default; Economic models; Economic statistics; Economic theory; Economics; Economics and Finance; Financial Services; Home building; Houses; Housing; Housing prices; Inventories; Inventory; Inventory management; Investments; Land economics; Macroeconomics; Ratios; Real estate credit; Real estate sales; Regional/Spatial Science; Sales; Securities prices; Studies; U.S.A; Homebuilder returns; Inventories; R33; G12; G14; Asset pricing; Short-run rigidity
• ISSN: 0895-5638; 1573-045X
• DOI: 10.1007/s11146-011-9340-1

The firm’s inventory-sales ratio prices exposure to the housing cycle with a predictable sign. The buyer of a new home holds a pre-construction contract at a guaranteed price with the right to cancel at any date up to delivery. The demand for contracts rises with falling user costs while lot supply is inelastic, leading to land bidding in booms. During busts sales decline and land bidding largely disappears. Delivery is from inventory at a cost of carry below that of construction. The firm’s inventory-sales ratio leads and is negatively correlated with its subsequent returns. For U.S. homebuilders over 1975 to 2009, a 1% increase in the inventory-sales ratio lowers next-quarter returns by five basis points.