I’m posting an extra-large version of this graph below because it’s the best way to show how to use leading housing price market indicators to forecast a market’s 3-12 month directional trend.
A couple of items to notice:
- As the Sacramento market began it’s painful price descent in 2007 (the blue curve), the negative correlation between the percentage of homes with price reductions – “% Price Decreased” on the right-hand axis and represented by the orange curve – and the market’s median ask price levels is clearly visible. Sellers began dropping their prices and the overall market ask price subsequently fell.
- The new sellers – “Price of New Listings” represented by the black curve – were coming into the market at prices below the exits. This signalled that the market was heading for a rapid and prolonged decline. New sellers saw that the market was deterioriating before lagging sold transaction prices revealed this to the rest of us.
- By early 2008, nearly 60% of active listings experienced at least one price reduction over a 90-day period – more seller price corrections to find the ask prices that would motivate buyers to take action. Eventually median prices fell by more than 50% from their January 2007 peak of $350,000 to below $175,000 in early 2009 before bouncing slightly off of those lows this year.
In a recent post – “More on Housing Inventory & Market Prices” – I examined how both new sellers entering the market and existing sellers were responding to market information to reach a new ask price decision and signaling the market’s direction in real time:
“The price of new listings leads the downward turn in the overall market median ask price, and the existing sellers on the market appear to coincide with this turn with more and more sellers beginning to drop their prices [measured by "% Price Decreased"]… that the effects are simultaneous because sellers are using the same local information to reach their ask prices.”
Zooming on the time series from September to December 2007 from the above chart, you can see this effect more closely. Sellers already on the market dropped their ask price while new sellers entered at consistently lower levels each week:
Here’s the good news – the inverse is happening in today’s market. Again zooming in and looking at the market from March 2009 to the present:
Notice how the Price of New Listings – new sellers entering the market – are entering at ask prices above the current exit prices in 2009. At the same time, fewer of the sellers already on the market are reducing their ask prices with the percentage of homes on the market with price reductions falling from 47.5% in March 2009 to 30% in September. This signals that that market strengthened this year, but there’s also convergence between the Price of New Lisings and the Price of Listings Absorbed. Moving into the Fall season, this strengthening may be short-lived if this trend continues while the % Price Decreased is showing subtle signs of slowing as well.
So what are the takeaways from this?
1. Watch the trend of the “Price of New Listings” and the “% Price Decreased” for signs of a market’s 3-12 month movement. In aggregate, sellers know what they’re doing. They set their ask prices based on recent pending and sold transactions – data that isn’t available publicly for 3-12 months after the transaction closes based on the local municipality. This data provides immediate visibility about where transaction prices will settle when these homes eventually sell.
2. Get geographically granular. If you’re in the mortgage servicing business or purchasing distressed assets for example, look at these leading indicators across cities and zip codes in the same metro area. Here’s a perfect example. Check out the same market indicators for Davis, the town directly adjacent to Sacramento. Davis is the home of the University of California-Davis and experienced only 15-20% price declines from 2007-2009.
But, Davis is seeing the price inversion effect that Sacramento experienced nearly two years ago – new listings are coming into the market this Fall are below the price of exits and the number of sellers on the market dropping their ask prices is starting to rise dramatically. Never assume that local markets act the same just because their in close proximity. Real estate is local so use local real estate data to market informed decisions.
3. Couple this analysis with a look at Days-on-market (DOM). Monitoring DOM in any market area offers the ability to project how long homes will take to sell. Comparing trends in Sacramento and Davis, it appears that while DOM in Sacramento is much higher, it’s leveled off in recent months while Davis is showing an uptick in its trend moving into the Fall.
4. Use current data. Comparing the market conditions for Sacramento and Davis six months ago would have yielded a different result. Davis was looking much stronger but is just starting to show some signs of weakness. This could be seasonal, but what if it’s not?
OK – that’s my free advice for the week. Either get on your horse and make some changes in your market analysis techniques or make uninformed decisions that you get to explain to your investors and shareholders.