What´s the Best Barometer to Determine the Direction of the Real Estate Market?

Median pricing reports do not always truly identify the values of all properties and often actually distorts them.  The reason for this is segments of the market perform differently (i.e. smaller 1st time buyer properties, properties requiring jumbo loans and luxury homes). These reports are then skewed to where the majority of homes that are selling at that time. Which is often controlled by available financing. Many consumers read media reports and have the impression that their home value has dropped a lot more in value than it probably has. Or, vice versa!

 

Want to know your properties value? You need to compare it to recent sales of similar properties.  Year in and year out though what is the best barometer for the direction of the market? "Market Absorption" or "Month´s Supply of Inventory".  The chart below shows the time, in months, that it would take to "sell" the remaining inventory for the month in question. This metric is a "one number summary" of how market supply and demand are changing from month to month. By definition the remaining inventory for any month is the number of properties that were For Sale on the Last Day of the month. This figure is then divided by the number that went Under Contract during the month (the most contemporaneous measure of buyer activity) to obtain the MSI figure for the month. Calculated this way MSI becomes a "leading" indicator of sales activity. When the number of properties that closed escrow (Sold) during the month is used MSI becomes a trailing indicator of sales activity. From a sales rate perspective this metric is an "inverse" indicator. The chart subtitle clearly states the percentage change between the first month´s value and the last month´s value (notice they are the same month but in different years). This "same" month comparison over different years is a popular real estate "yardstick" because there is no "seasonality" involved in the measurement. Thus, any changes that have taken place are primarily due to market "forces", i.e. the collective behavior of all consumers participating in the market. Invoking the "linear" trend line helps you recognize whether the rate of sales activity is changing over time or not; and to what approximate degree. An upward sloping trend line indicates an increase in MSI (sales rate is slowing); a downward sloping trend line indicates a decrease in MSI (sales rate is increasing); and a flat trend line indicates that there has been very little change in MSI (the rate of sales).