What Wall Street Taught Us About Using A Real Estate Chart
A little over a year ago, I published an article that explored the use of a real estate chart for the purpose of forecasting future movements of the Tallahassee real estate market.
Unlike using supply and demand (which I favor and which usually gives us ample warning to changes in the housing market), a real estate chart relies more on home buyer behavior and is based upon the basic observation that most markets "return to a normalized level."
Stock market followers use charts all the time to forecast (predict) future values and moves in the stock market, so I have always wondered if the same methodology could be used in the real estate market?
Real Estate Chart Analysis
The following is an updated view of the real estate chart featured in the blog a year ago. The source of the information contained in the chart is all recorded home sales in Tallahassee (meaning not just those that were recorded in the Tallahassee MLS).
In the real estate chart above, the yellow diamonds show the number of home sales recorded each month. The red line records the one-year average of monthly home sales, the green line the five year average, while the blue line shows the ten year average of monthly closed home sales. Simply put, the real estate chart tells us the following:
- For the past year, Tallahassee recorded 240 closed home sales each month
- For the past five years, Tallahassee recorded 290 closed home sales each month
- For the past ten years, Tallahassee recorded 450 closed home sales each month
All three trends are still seeking lower ground, which is contrary to what we were hoping to see by now from this chart.
I am hoping our long-time reader and chart enthusiast "Bob" will read last year's post and comments, and then give us his updated views based upon this new information.
Long Term Use Of A Real Estate Chart
Our discussion from a year ago reviewed the benefits of using a real estate chart to forecast future changes in the Tallahassee real estate market. We concluded that the most appropriate one to use included an eight year moving average, as it seemed to show the most consistent mean of the long-term view of the one year average of monthly closed home sales.
When we examine the real estate chart above, we see the 8 year moving average has fallen to about 415 home sales per month (meaning over the past 96 months, the average number of homes that closed each month was 415). This is consistent to where the market was in 2000 (representing the 8 years of 1993 through 2000) which I suspect was a fairly "normal" 8 year run.
But the fact that our one-year moving average is still so much lower than the 8 means the 8 year moving average is still going to be coming down for quite some time. It does not appear that a crossover is going to happen this year or next, and I would love to see what any of our "real estate math" folks have to say about what they are seeing here.
Personally, I will stick to my supply and demand analysis to forecast the future of the Tallahassee real estate market, but the real estate chart above supports my conclusions based upon the relative supply of homes in Tallahassee.