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Friday, February 23, 2007

Plato on Housing Markets: "The excessive increase of anything causes a reaction in the opposite direction"

Making Honest Sense of Housing Stats


Where do buyers and sellers get reliable housing advice in one of the great decisions they will make in all of their lives? It is difficult these days to find objective online information about trends in the housing market. Everyone has an agenda in their reporting, and as such things can be confusing.

There are umpteen housing blogs who favor an interpretation that is akin to economic Armageddon. The competing voices largely come from realtors, lenders and their organizations, who also have an agenda. This group says something like, "the market has stabilized, it's a good time to buy". Both sides use omission and spin to reach their conclusions. I'll go with Plato, back to some good old sixth grade concepts for my own analysis, thank you.

Forming an Opinion: Advice From an Old Futures Trader
In any market, for any commodity, the first factors to look for are in the law of supply and demand, which Plato certainly grasped. Futures traders, ( I traded oil markets for ten years), call these factors, the fundamentals. This is an unimaginative, though descriptive term about what it looks at. No amount of psychological frenzy can trump supply and demand in the long run. The fundamentals are thus friend and guide.

For housing markets, on the supply side, we need to be concerned about inventory levels, and the rates of input. This will allow us to ponder the minds of sellers and future inventory levels. We can then start to decide if the market is soft, if it has bottomed out, or any other configuration.

For sellers then, we will examine current inventories, and also two measures of seller activity. One is the number of new residential permits issued, and the other is the number of houses where construction actually began , commonly known as "housing starts". On the demand side, we need to know current prices, and glimpse a look into buyers' minds by tracking new mortgage applications.

These measures are a pretty good first look at the fundamentals of housing markets and answer a multitude of questions that play directly into the law of supply and demand. How many homes are for sale? Is that number rising or falling? Is that number high or low for this time of year? Are sellers and builders entering or exiting the market? What are the prices and how do these compare historically? Are buyers entering or standing on the sidelines? The collection of answers to these questions will give any buyer or seller a basis from which to act, without being influenced by anyone's agenda.

Today's Agenda Free Opinion

Looking at the most recent data available, here is how housing stats stack up:

Supply Factors

Inventory: Inventories grew dramatically in the first 10 months of 2006 as buyers retreated and sellers were committed. For Dec 2006, there were 3.508 million homes for sale. This is a 6.8 month supply. Inventories have fallen from a high of 3.861 million in July 2006, a decline of 9.1%, and have fallen from a high of 7.4 months supply in Oct 2006.

New Permits: Jan 2006 saw 1.568 million new permits, a decline of 28.6% vs. Jan 2006. Sellers/builders remain in stiff retreat.

Housing Starts: Jan 2006 saw 1.408 million starts, this is 14.3% less than Dec 2006 and 37.8% below Jan 2006. That inventories are drastically seeking to halt price erosion is obvious on all fronts.

Demand Factors
Current Prices: Selling prices have obviously fallen in reaction to the huge mid 2006 inventories. For Dec 2006, the average selling price was 269K, down from a high in June 2006 of 276K, and are once again about equal to the Dec 2005 price of 268K, a decline of 2.6%.

Mortgage Applications: These are reported weekly by The Mortgage Bankers Association, so the sheer frequency relative to other housing indexes can build confusion. Since Dec 2006 reports have fluctuated. Since the report of Dec 30, 2006, there have been five weeks where applications increased and four weeks of decreases.

No Nonsense Conclusion: This is a classic situation of a market that is unsure and is testing a potential bottom. Fundamental indicators on the supply side show significant declines in inventories and in selling prices. This is no surprise to Plato, and buyers should be watching this closely.

At the same time, an increase in new buyers has only modestly been observed to this point. In futures trading jargon, we are looking for a confirmation of the market's reversal. Personally, if I saw a couple of more reports with falling inventories with an increase in mortgage activity, I would take that as confirmation, and a signal to buy.

Tom Ploski is a former futures and cash trader in commodity markets, please feel free to visit us at The Black Bear Realty Home Page.

Filed Under: National Market News, Tips for Buyers, Tips for Sellers

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Blogger Biby Cletus said...

Nice post, its a really cool blog that you have here, keep up the good work, will be back.

Warm Regards

Biby Cletus - Blog

10:18 AM  

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