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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Joe Manausa is a real estate investor and the Broker and Co-Owner of Joe Manausa Real Estate. He can be reached via e-mail through the Tallahassee Real Estate Website or catch his latest writings on the Tallahassee Florida Real Estate Blog , or by calling (850) 386-2001.