You Don't Have To Be A Rocket Scientist To Anticipate Real Estate Market Changes
People rely on opinion columns far too often when assessing the future of the real estate market. Much like the stock market, people tend to believe what they read and just follow the herd. But there is any easy way to figure out the current direction of the real estate market and you don't have to work for NASA to understand it.
Four Rules Defining Real Estate Market Strength
In order to demonstrate the simplicity of the model, let us assume that you agree on these four points about the housing industry (and if you do not, please comment below and explain why).
- A "Good" real estate market simply means that you can sell your home when you want to move
- A "Balanced" market occurs when inventory levels are in the 4 to 7 months of supply range.
- A "Sellers" market occurs when inventory levels drop below 4 months of supply
- A "Buyers" market occurs when the inventory exceeds 7 months of supply
Again, I am assuming you agree with the above postulates. If so, then all one needs to do to anticipate real estate market movements is to study the short and long term trends in housing inventory (or commercial inventory if that is where one is interested) in their local market areas.
If inventory is growing, the market is softening and prices should see slowed appreciation (and depreciation if the market moves too strongly towards a buyers market). If inventory is reducing, prices should stabilize and see appreciation once the market is balanced.
The following is a graph of the Tallahassee real estate market's housing inventory, as seen on The Market Bulletin. It shows a thirty day trend (meaning short term). Notice how inventory has been reducing for quite some time now. Unfortunately, we can see the level of reduction is slowing, indicating that we might be seeing a shift in the market.
Long Term Trend Removes Seasonality In Real Estate
It is important to study the short term trend above, as any movement in the market might be noticed very quickly. However, it takes a long term trend to remove seasonality from the data. Seasonality (historically, spring and summer are the times of year when more people move) affects the short term trends but has no impact on the 1 year and longer trends. Unfortunately, I have kept a track of Tallahassee home inventory information starting in 2008, so it will take more time before our tracking model is fully up to speed.
The following graph shows that all of the short term trends (30 days to 150 days) show that the market is reducing inventory, but the 180 day trend shows it to be nearly balanced.
How Is The Real Estate Market Doing
Based upon what we have studied above, the short-term trend says that house inventory levels are getting better, but we are still very heavy into a buyers market. Prices should continue to drop until we see stabilization near the six months of supply range. Unfortunately, we will not have a long-term trend report to guide us until January. Nevertheless, the prudent seller should price their home below the competition, as home prices are still under great pressure.
One must also note that it is entirely possible for some of the price ranges to be in balance, while others are out of balance. I will address this more in a future Tallahassee Real Estate Blog article.
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