Discover A Simple Method To Accurately Predict Future Home Sales
Today is the big day. Today, September 24, 2008, in this real estate blog, I reveal my "prediction" for the real estate market in the coming years. I invite your criticism, support, arguments, and/or feedback in any capacity. You see, I have developed a theory that there is a measurable correlation between population and home sales, and that both can be measured and the results used as a "guide" to determine the direction that the real estate market is seeking.
Real Estate Theory Assumptions
- There is a measurable correlation between home sales and population size
- In every commodities market (in this case real estate) buyers fall into one of two categories, discretionary and non-discretionary.
- Outside influencers make the market imperfect, but the market will always seek to return to "normal," which is defined as the expected ratio between home sales and population.
Correlation Between Home Sales And Population Size
Common sense tells us that markets that have more people should also have more home sales. Therefore, if a market has 1,000,000 people residing in it, then it will most likely see more home sales than a market which hosts a population of 100,000.
With this in mind, I decided to run a comparison of the number of homes sold and population size for the 1990s in the Tallahassee real estate market. I found there was an apparent "norm" of about 2% (meaning the number of homes sold each year could be expressed as 2% of the market population). So if the Tallahassee real estate market has 250,000 residents, we should, on average, expect about 5,000 home sales.
Discretionary Versus Non-Discretionary Buyers
For the purpose of this theory, I am going to place all potential home buyers into one of two groups:
- Discretionary buyers do not have to buy. They buy a home in Tallahassee because they want to move. They are motivated by value and purchase only when they want to purchase.
- Non-discretionary buyers need to buy. They have a life event that will cause them to move (relocation, job change, less income, etc.). Whether these "buyers" buy or rent, they fill the same position ... they are a home consumer. If they choose to rent, somebody else is buying the home and leasing it to them.
Outside Influencers Make The Real Estate Market Imperfect
Simply put, we know that no math formula will tell us exactly how many homes will sell each year. There are too many variables (interest rates, loan programs, housing supply, consumer confidence, other commodity strengths, jobs, economy, etc.) that play a large part in how the housing market does on a year-to-year basis. But over time, this theory assumes that the market will seek to come back to "normal," which in the case of Tallahassee is the 2% of the population level.
The Geeky Math Graph Of Tallahassee Real Estate
Now that I have covered the basic rules of this theory, let's graph them and try to see where the Tallahassee real estate market should be heading.
The Six Keys to Understanding The Tallahassee Real Estate Market Graph
- Looking at the horizontal axis, we see the dates run from 1991 (actual figures) to 2011 (projected figures).
- The population is represented by the dark blue fill and displayed on the right vertical axis. While all years are estimates from the U.S. census, the 2008-2011 still have to be verified in during the 2010 census. Many people are projecting an upwards adjustment to our population figures, which would result in an upward estimate of home sales using this model (theory).
- Non-discretionary buyers are an estimated amount each year and are represented in bright red of each vertical measurement.
- Discretionary buyers are an estimated amount each year and are represented in maroon of each vertical measurement.
- Total buyers are the combination of the bright red and maroon bars. For the years 1991 through 2007, these are real, measured figures. For 2008, I have annualized the January through August actual figures and this final number should be pretty close to what occurs in the Tallahassee housing market.
- The pink line represents the amount of home sales (total buyers) that the market "expected" each year, based upon the 2% of population equation. Since the market population is growing, we anticipate that over time, home sales will grow as well.
Why Tallahassee Home Sales Will Be Low For Three More Years
If you have followed the assumptions laid out up to this point and you have studied the Tallahassee real estate graph above, then you can see that we have spent many years (6) with more home sales than the model expects. As a matter of fact, the years 2001 through 2006 created an "over balance" of 8,612 home sales that now must be absorbed by the market.
Discretionary buyers were out in full force during the 2001 through 2006 years, and I suspect they will be fairly dormant until 2012. I suspect that we will see less than 3,600 home sales in Tallahassee each year from 2008 through 2011, and just over 4,000 home sales in 2012.
If the outside influencers spark our market, then the recovery will be less severe, but will take significantly longer. If there is any accuracy to this model, then the market needs to absorb the additional 8,612 home sales. Since most markets "over react," I suspect this will occur over the next three years.
What Will Happen To Home Values In Tallahassee
If you are a regular visitor to this blog, then you are aware that home prices have declined in Tallahassee over the past few years. The "average home price" has remained fairly stable, but we have demonstrated that while the price is the same, the actual "average home" has changed. Buyers are buying more home for the same money.
We track the inventory of homes for sale in Tallahassee every day on our Tallahassee Real Estate Market Bulletin. By paying attention to the inventory levels, our readers will know when the market turns from a Buyers market to a Sellers market, and when we should expect to see home values rise again.
If you are a home owner who needs to sell, price your wisely. If you do not need to sell, take your home off the market until conditions are more favorable. Again, you can know when this occurs by following our Real Estate Market Bulletin.
What Is Your Prediction For Tallahassee Home Sales?
So I've laid all my cards on the table. This will be available on this site for many years to come and you will be able to refer back to it to congratulate me (or mock me). But I want to know what you think too! Is my model realistic? Too simplistic? Did I leave too many factors out? Are my assumptions bogus (for example, I'm using the 1990s as my control set, what if that decade was really good or really bad?). Please comment below and let me know!
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That is tremendous analysis. One thing that I think is important to investigate is your "control" group of the 1990s. In your summary paragraph, you suggested that this group (1990s) may not be indicative of "normal".
Personally, I believe that in the next few years lending restrictions and tightening credit could cause a buyer squeeze that is vastly different than what the buyers of the "control" group experienced. An interesting comparison to follow to help corroborate this would be a 1990s vs 2000s mortgage interest rate comparison graph.
I love your model and as it stands alone, it looks like a good prediction to me. However, I noticed that the period above the trend line for the discretionary purchasers also coincides with the period where interest rates were low. To graph that would be difficult, because you’d need an inverse of interest rate to make it work. Perhaps if you expressed the interest rate in these terms:
For an $500 P&I payment, how much could you finance on a 30 year fixed note. Plot this, and I think you’ll see that the trough won’t be as long…timewise.
Thanks Dave. I agree with you that the money markets are going to have a huge affect on our market. Here's a thought though.... will loosening or tightening of money have a long-term affect on unit sales or values? I suspect it will be more of the latter than the former.
Great analysis. However, I think in the current environment, we have to throw out the old paradigm that “all real estate is local.” That paradigm worked well in the days before NINJA loans and subprime securitization. Now, the macro environment will have a much bigger effect on our local market than ever before.
Unfortunately, Tallahassee will join the rest of the nation and pay for the sins of the bubble areas like Miami, Las Vegas, Phoenix, and Sacramento. So, you’ll have to add to your analysis the following:
1. As Dave pointed out, the credit markets are going to be puckered for years to come. The days of no-money-down loans to folks with spotty income and credit are gone. I suspect it will get even worse, where we return to the pre1990s standards of 20% down, 2 years of consistent, verifiable income, 720+ FICOs, and strict 28/36 mortgage ratios. I suspect even FHA and VA loans will be severely restricted. How many buyers in Tallahassee are going to have 20% down and meet all the other requirements?
This single change will have by far the biggest impact on the Tallahassee market – far more than any items discussed.
2. Florida’s economy is going to be really hurt by this downturn. The State will lose millions in both property tax revenues and sales tax revenues. We all know what happens in Tallahassee when the State loses significant amounts of revenues. Tallahassee’s unemployment rate is great right now, but I don’t think that will continue. I’m already hearing about some downsizing.
3. The Mainstream Media will flood us with constant and relentless negative stories about real estate for years to come. This is bound to influence prospective buyers – especially first-time homebuyers. There is already a negative perception growing about real estate; imagine what it will be like after reading two more years about poor, hapless victims facing foreclosure after their jobs got outsourced to a Third-World country.
Very thought provoking Joe...as always. I think Dave's observation of a tightening credit market will have a negative impact on sales as well. Also, and perhaps you have already done this...I think another 10 years of sales/census data would be helpful...27 years, versus 17 years...although one could make a case for the current crissis and subsequent Fed remedies being "new and different". Here's a question for you: I was once taught that RE tends to have 7 year cycles...it would seem to fit with your graph somewhat...what do you think?
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