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The Inventory-Sales Ratio and Homebuilder Return Predictability

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  • Peter Chinloy

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  • Zhonghua Wu

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    Abstract

    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. Copyright Springer Science+Business Media, LLC 2013

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    Bibliographic Info

    Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

    Volume (Year): 46 (2013)
    Issue (Month): 3 (April)
    Pages: 397-423

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    Handle: RePEc:kap:jrefec:v:46:y:2013:i:3:p:397-423

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    Web page: http://www.springerlink.com/link.asp?id=102945

    Related research

    Keywords: Asset pricing; Inventories; Short-run rigidity; Homebuilder returns; G12; G14; R33;

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    1. Albert Saiz, 2010. "The Geographic Determinants of Housing Supply," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 1253-1296, August.
    2. Yongheng Deng & Peng Liu, 2009. "Mortgage Prepayment and Default Behavior with Embedded Forward Contract Risks in China’s Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 38(3), pages 214-240, April.
    3. Kahn, James A, 1992. "Why Is Production More Volatile Than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 481-510, May.
    4. Mark Bils & James A. Kahn, 1999. "What Inventory Behavior Tells Us About Business Cycles," NBER Working Papers 7310, National Bureau of Economic Research, Inc.
    5. Falk, Barry L. & Lee, Bong-Soo, 2004. "The Inventory-Sales Relationship in the Market for New Single-Family Homes," Staff General Research Papers 12006, Iowa State University, Department of Economics.
    6. Coulson, N Edward, 1999. "Housing Inventory and Completion," The Journal of Real Estate Finance and Economics, Springer, vol. 18(1), pages 89-105, January.
    7. Glaeser, Edward L & Gyourko, Joseph & Saks, Raven, 2005. "Why Is Manhattan So Expensive? Regulation and the Rise in Housing Prices," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 331-69, October.
    8. Mitchell A. Petersen, 2005. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," NBER Working Papers 11280, National Bureau of Economic Research, Inc.
    9. Davis, Morris A. & Palumbo, Michael G., 2008. "The price of residential land in large US cities," Journal of Urban Economics, Elsevier, vol. 63(1), pages 352-384, January.
    10. Robert E. Hall, 2001. "Struggling to Understand the Stock Market," American Economic Review, American Economic Association, vol. 91(2), pages 1-11, May.
    11. Norman Miller & Liang Peng & Michael Sklarz, 2011. "House Prices and Economic Growth," The Journal of Real Estate Finance and Economics, Springer, vol. 42(4), pages 522-541, May.
    12. Aubhik Khan & Julia K. Thomas, 2007. "Inventories and the Business Cycle: An Equilibrium Analysis of ( S, s ) Policies," American Economic Review, American Economic Association, vol. 97(4), pages 1165-1188, September.
    13. William C. Wheaton & Raymond G. Torto, 1988. "Vacancy Rates and the Future of Office Rents," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 16(4), pages 430-436.
    14. Barry Falk & Bong-Soo Lee, 2004. "The Inventory-Sales Relationship in the Market for New Single-Family Homes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(4), pages 645-672, December.
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