Perhaps the question that I get more often than any other is "What do you see happening in the future of the Tallahassee real estate market?"
Unfortunately, I do not have a crystal ball, but I do have data on hand that has been recorded since 1991 and I'm thinking that there might be a way to extrapolate a housing consumption estimate for the future by looking at what has happened in the past.
I have a housing consumption formula that I have produced for this blog posting and I would love to see comments from readers regarding any errors in the model or just commenting on the results of the analysis.
My formula has two key points:
º There always exist two types of housing consumers - Discretionary and non-discretionary
º The non-discretionary buyers can be predicted by looking at population changes
Discretionary home consumers are people who buy a home simply because they want to make a move. They typically have just undergone a "life event" that created some type of desire to make a move, whereas non-discretionary buyers pretty much have to move. They have been relocated from one market area to another or have had something happen that requires them to move. While there is certainly some "gray area" between these two extremes, I will consider everybody in either one or the other category when trying to determine a housing consumption estimation.
The demand side of the housing consumption issue is the number of potential buyers for homes in the Tallahassee real estate market. And contrary to popular belief, the number of potential buyers remains relatively constant, moving as the population moves. It is the perception of value that causes more people to consume or the lack of perception of value that causes people to not make a move.
In most markets where the population is changing (whether growing or receding), you can expect the non-discretionary consumer pool to be changing at that same rate. It is this relationship between population change and non-discretionary consumption that might allow one to predict future housing consumption in any given real estate market. The graph below projects my prediction of the housing consumption in the Tallahassee real estate market through 2010. This includes both discretionary and non-discretionary buyers, and is accurate to .0000001% (just kidding).
As you can see from the graph above (and the chart below), the discretionary buyers went on a buying-spree from 2001 through 2006. Prior to that, there was basically 10 years of conservative buying from this group. Currently, we are seeing very little action from the discretionary buyers and it is having a significant affect on housing consumption in the Tallahassee real estate market. Last year, we saw fewer home purchases than we have seen since 1998, and this year will be the worst year for which I have records (I have all years from 1991 to present).
While I will keep my formula for predicting the home sales private for right now, I will disclose that discretionary buyer habits are predictable over a long period of time, but tougher to predict over a shorter term. Looking at the table above, I have predicted 4,390 home sales for the Tallahassee real estate market in 2008. Any error in this number can be applied to the following two years, meaning the predictive model projects housing consumption to be roughly 15,522 for the three years of 2008-2010. Additionally, all population numbers in the past came from the US Census, while the future numbers are my estimates based upon the recent trend of growth in Leon County.
I encourage all the math-wizzes out there to comment on the reasoning in my model. I would like to continue working on the "special sauce" and then start applying it other real estate markets across the United States.
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Do you think your numbers are fairly accurate for other markets as well?
Interesting, howerver, I don't really understand how you got your 2008 through 2010 predictions.
Right now, YTD, we're tracking about 50% and 30% below the 2006 and 2007 sales number respectively. Assuming that this trend continues through the rest of the year, we should end up with around 3,500 sales in 2008.
Based on the data we have YTD, I just don't think we're ever going to get the 4,390 sales in 2008 that you're predicting.
The reason I think the near-term downturn in sales will continue is the elimination of easy credit. From 2001 to mid-2007, loans that required no docs and no downpayments were plentiful. Now, they are now.
Unfortuantely, I think the return of pre-2000 credit terms (10% down and verifiable income) will restrict sales for near term.
When you couple this with the trends we've been seeing thus far this year, I can only assume that sale trends will stay below 4,000 for both 2008 and 2009.
Don't you think the more restrictive credit markets will continue to hamper local sales?
I meant to type, "Now, they are not."
Steven, thanks for the great input.
I disagree with your opinion on "the near-term downturn in sales will continue is the elimination of easy credit."
I agree that these loans are gone, but I believe they are only a small part of the problem. Look at the straight green line on the graph. That represents the consumption trend. Whenever we are above it, we are creating a future correction below it. Whenever we are below it, we are creating a future correction above it. Our market went so crazy on speculation (the beach market dragged us into speculation) that we created a huge correction that we've been in for late '06, and all of '07 and all of '08.
Now, for your prediction of 3,500 home sales this year, I would have to tell you it "feels" that way, but the model showed the 4,390. I'll guess we'll just have to wait and see....
Great question Kathy. The short answer is "I don't know." I would just have to run the "other market" through the model. I suspect the overall real estate market in the U.S. will show similar results, but local factors are often more important that global factors.
Trying to predict the future? I like the models, but as with all models they need to be mathematically provable. Honestly there is not 1 equation on here... but some amazing data.
I think your on to something with the Population / Houses sold correlation.
What I think your proposing is achievable, but Identification of the variables is the Key.
You've got one equation formula for two equations: Ax + B = C
P0 = 200,000
P1 = 250,000 (Approximate)
T0 = 1991
T1 = 2010
(P1-P0) / (T1-T0) = 50,000p/19y = 2631 People/Year more Live in Tallahassee.
A = 2631 p/y
x = Some year
B = 200,000 = Initial population.
2631 * x + 200,000 = Red Line
Sales Per Year:
S0 = 4500
S1 = 6500
Y0 = 1991
Y1 = 2010
(S1-S0)/(Y1-Y0) = 2000/19 = 105 More Sales of houses per year.
A = 105
x = Year
B = 4000
105*x +4000 = Green Line
These two equations are linear, and don't even match the chart.
Creating equations that are accurate for predicting future trends... especially if they vary far from past behavior is close to impossible.
What about tracking median income vs median house cost?
I would be VERY scared of using ANY equation to predict how housing markets will be soon be or in the future.
Consider this: Oil goes up... Desirability of houses near work goes up. This one line "factoid" or something... breaks all the current equations.
All I can say is... Graph/data fitting equations break if conditions / or Variables are not accounted for.
Wow Roscoe, thanks for the visit and thanks for the insight.
I agree in general with everything that you said. One point, "Creating equations that are accurate for predicting future trends… especially if they vary far from past behavior is close to impossible," I agree for a specific year, but overall I think the formula as created should be fairly on point.
Your final paragraph is dead-on but it parallels the assumption set...if population (jobs can ultimately = population change) grows, so does the housing market.
Time will be a great test. Thanks for stopping by.
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