How To Watch For Changing Real Estate Trends

Posted by Joe Manausa on Tuesday, November 17th, 2009 at 11:19am.

Home sales are on the rise, yet home prices continue to drop. This article demonstrates the Five Stages Of A Real Estate Market Transition and why we will continue to see home prices drop for the foreseeable future.

Watch For Changing Real Estate TrendsMany people are wondering just exactly where this crazy real estate market is heading and how to anticipate its next move.  Unit sales have dropped and prices are continuing on a downward spiral.

In the past three years, we have seen a very hot sellers' market change to a very cold buyers' market, but many people do not realize that there are five distinct stages that we must move through to  transition from a buyers' market back to a sellers' market.

After posting yesterday's Tallahassee Housing Report, I received a  comment from a colleague who wanted me to cover this very issue, and she wrote:

Hi there, been doing this since 1981 and do have lots of past and present clients really interested in your wonderful information.

What is hard to convey for me is that even though sales are creeping up a bit, prices are not as far as I can tell. Would you cover this ,in comparing sales increases to prices increases? Thank you, Sandy

Five Stages Of A Real Estate Market Transition

As the market started to cool from a sellers' market to a buyers' market, one of the residual side effects was an increased inventory of homes for sale. Home builders and developers, who were previously working at a frantic pace to supply the market with enough homes, missed the tell tale signs of the end of the bull market and kept building more homes.

Now that we have this over-supply (glut) of homes, we must move through the five stages of a real estate market transition before we see home values start to appreciate again. These stages include:

1. Real estate inventory levels stop rising and begin to decline. 2. Home values fall at an accelerating rate. 3. Year over year home sales increase. 4. Real estate inventory levels reach market equilibrium (6 months of supply). 5. Home values stop falling and begin rising.

So, taking these by the number, we can vigilantly monitor our market so that we know where we are, and knowing the five stages of a real estate market transition will tell us where we are going!

Watch For Changing Real Estate Inventory Levels

If you are a regular visitor to our Tallahassee Real Estate Market Report, then you will know that we monitor inventory on both short and long-term schedules. Changing inventory levels is one of the most important signals that the market sends us about future changes, so we definitely pay attention.

We confirmed that long-term home inventory levels in Tallahassee began changing quite some time ago. The Tallahassee MLS shows declining inventories in the entire system, with Leon County leading the way. The following real estate graph covers all areas of surrounding and including Tallahassee, and it shows the number of homes listed for sale (red line) has declined, as well as relative supply (purple line) has begun declining as well.

Graph Of Changing Real Estate Inventory Levels

By monitoring the supply changes in the Tallahassee MLS, we have confirmed that the first stage of a real estate market transition has occurred.

Look For Real Estate Values To Decline

The best way to gauge what real estate values are doing is to look at our numerous Tallahassee Neighborhood Reports. They all show levels of real estate depreciation ranging from 18% to 23% from the peak of the market.

But in order to show all of Tallahassee, we can get a general feel for home prices by looking at the average home price trend across the entire Tallahassee real estate market. While this really shows buyer activity more than it directly addresses appreciation versus depreciation, I think it is "good enough" for our purposes here.

Graph of Real Estate Values Declining In Tallahassee

By monitoring the trend changes in real estate values, we have confirmed that the second stage of a real estate market transition has occurred.

Monitor Year Over Year Home Sales

By tracking the 365 day trend of daily home sales in the Tallahassee MLS, we should get a pretty good idea when the number of homes selling in Tallahassee switches from a declining level to rising level. The following real estate graph can be seen (updated regularly) at our Tallahassee Real Estate Market Report.

Tallahassee Real Estate Market Home Sales History2

By monitoring the trend of daily home sales, we will be able to confirm once the third stage of the real estate market transition has occurred. Right now, it looks promising that this has occurred back in October, but it will take more time to confirm that it wasn't a temporary stop on the way down to the bottom of the market (which I do not believe it was).

Confirm 6 Months Of Supply Of Homes For Sale

If we have indeed cleared the third stage, the next step will be to look for real estate supply levels to return to a more balanced level. It is pretty much agreed upon by my fellow real estate professionals that 6.0 months of supply is the "balanced market" level. The Tallahassee Home Inventory Report for November 2009 shows that we are not going to hit this level very soon.

Graph of Supply of homes for sale in Tallahassee

The real estate graph above shows that the Tallahassee real estate market (Leon County) has seen relative supply drop to 13.7 months .... which is a large glut of homes that need to be sold.

[NOTE, here is the bottom line answer to Sandy's Question]

In order to stimulate more buyer activity, home values must become more attractive. As home owners continue to lower their prices, more buyers will be able to afford these homes and more buyers will be enticed to buy.

It is through "falling prices" that we will see the current glut of homes for sale be reduced to bring our market back to equilibrium, and therefore prices will continue to fall, even as the number of homes begins to rise, until that market equilibrium point is reached (roughly 6 months of supply of homes).

Confirm Real Estate Market Equilibrium With Rising Prices

Home price appreciation will not occur as an event in the Tallahassee housing market, rather it will occur in pockets as different price points in different areas hit market equilibrium. We will see signs of this long before the overall market average hits the magical six months of supply.

For example, right now, homes price between $150K and $200K in the northeast have dropped below 7 months of supply. We most likely will see depreciation levels slow down in this price range long before we see it in other price ranges. That is why I like to look at the current Tallahassee Home Inventory Report, which can be downloaded from the sidebar in the Tallahassee Real Estate Blog.

Tallahassee Real Estate Blog Reader Comments

Today's blog was inspired by a question from one of our readers. If this is the kind of information that you would like to see in the Tallahassee Real Estate Blog, please leave questions at the end in the comments section and we will work to make them part of our future posts. The quality of our content only gets stronger through reader interaction, so thank you to Sandy and every reader who has commented at our blog.

Using Twitter To Spread The News About Tallahassee Real Estate

You might have noticed the use of the "Twitter Bird" below in many of my recent blogs. You might wonder why it is there? The fact is Twitter is the 13th most active web site on the internet (according to Alexa) and people are Tweeting away and gaining much of their news through that site.

If you have a Twitter Account, you can "Tweet" this article by clicking on the blue bird below. By doing so, you will share a link to this post to all of your followers on Twitter. It takes less than 30 seconds to do, so please help "spread the word."

HousingReporter On Twitter Is The Top Twitter Real Estate Broker Please click here to tweet this to your friends!

Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.

1 Response to "How To Watch For Changing Real Estate Trends"

Brian Ward wrote: This is a great explanation. It helps us all understand where we are and when the Sarasota Florida market will start improving in any real sense, price-wise. Sales are picking up in volume but the overhang of bank-owned and short-sale properties are holding prices down..

Posted on Wednesday, December 9th, 2009 at 2:28pm.

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