Real Estate: Housing market indicators

Prices

Whether you're a buyer or a seller, the most simplistic way to look at the market is by following the average sales price of homes sold. If they're going up, that's usually a reflection of improving demand. If they're going down, the opposite is true. That's Economics 101. However, it's important to remember that average prices can sometimes lead you astray, because of the "mix" of homes sold and/or the sample size used. When we refer to the "mix," we're talking about the fact that the type of homes sold can vary from one period to the next. If high-priced houses are the hot ticket one month, it can artificially pull the average price up. Conversely, if budget homes are what's selling, it can pull the average price down.

For example, right now there's a rush of first time homebuyers out there trying to beat the Nov. 30 deadline for the federal $8,000 tax credit. Those people aren't buying million-dollar houses. They're snapping up entry-level homes. As a result, average home prices over the next couple of months will likely see downward pressure due to this change in the mix. Regarding sample size, as the universe of homes you're looking at becomes smaller, the data is less reliable. Again, changes in the mix for a small sample can skew the numbers.

Inventory

Here, we're looking at how many houses are on the market. If you've got a lot of unsold houses, that's not good for the market. Another way to look at this is in terms of "months of supply," or how long it will take to sell the current inventory at the present sales rate. If you look at the geographic region covered by our multiple list system (which includes mostly Maryland, D.C. and some of the surrounding states), the average months of supply for 2004 and 2005 hovered around two. From there it shot up to almost 11 months by mid-2008. Since then it has been steadily declining. As of September 2009, the figure stood at 6.4 months of supply. That's still high by historical standards, but it's heading in the right direction.

Days on the market

How long it takes to sell a house, or the velocity of sales, also gives us a clue as to the vitality of our market. If homes sell quickly, that usually means inventory is low, demand is high, and prices are considered reasonable. A graph of days on the market looks very similar to one for months of supply. In late 2005, the average days on the market was less than 30. By 2008, it was up to almost 130. As with months of supply, it has been dropping and is now around 90. But it also has a ways to go before it reaches what agents might consider normal. Another point about days on the market is that it's not the stigma it used to be. If a house was on the market a long time, buyers formerly identified this as a red flag and thought it to be a sign of something wrong with the property. Today, it's more of an indication of overall market conditions and, for the most part, no longer reflects poorly on the ability to sell a home.

Pending sales

Pending sales refer to homes that are under contract, but have not yet gone to settlement. As such, they give us a bit of a peek into the future. If pending sales are going up, homes sold will also ultimately rise, albeit not by the exact same amount. In the process, some of these contracts will fall apart, and the home may not go to settlement. Nevertheless, pending sales are a leading indicator of market health down the road. For a while now, we've seen nothing but increases for this market statistic. In the three month period ending Oct. 3, 2009, pending home sales are up by 54% versus the same period year ago. Largely because of financing issues, more contracts are failing to be consummated in a sale. Even so, pending home sale numbers are clearly a positive sign. However, there may be an increase in the lag time between the direction of pending sales and a corresponding uptick in homes sold. This is because of the additional time it now takes to get a home to settlement. In the past, you could easily settle 30 days after you got a signed contract. Today, bank involvement with transactions like short sales and foreclosures can significantly delay settlement.

Housing affordability index

There are a variety of indices that measure changes in the public's ability to purchase a home. These indices use mathematical formulas which bring together various statistics which, in combination, quantify buying power. They take into account factors such as mortgage rates, home prices and household income. Right now, the housing affordability index used by our multiple list system stands at 141. That's about where it was in 2004. The index dropped to a low of just over 90 in mid-2006. It has been rising ever since then. Like pending sales, this is also good news. But high housing affordability doesn't always translate into homes sold. Buying a house isn't some sort of impulse purchase, and even with low interest rates and affordable prices, continued concern about jobs and the overall economy is still putting a drag on the housing market.

Gut feel

Unlike raw statistics, a knowledgeable agent gets a sense of where things are going. Generally, it's the conglomeration of all these numbers in addition to the anecdotal experiences of what we see going on around us. Is the phone ringing; are agents busy in the office; are people, by and large, more positive about the future? This market indicator is far from scientific, but it's seldom wrong and one we pay attention to. So, what does our gut tell us? It looks like we may be turning the corner. At worst, we're bumping along the bottom. We may be pulling out of the worst housing market in 40 years, but it's a fragile recovery and the climb back to some semblance of stability will be long and difficult. Nevertheless, there's hope on the horizon.

In today's computerized world, there are countless ways to analyze something as complex as our economy, and more specifically, the housing market. The indicators we discussed here are but a few of many. And no one indicator is the "be all, end all" to evaluating where we've been or where were going. But, taken in their totality, they can help shine some light on what the future might hold. The only certainty in all of this is that it will be uncertain. It's not as easy as extending a trend line on graph. But if you're well informed, it'll always give you a leg up on charting the best course for navigating the troubled waters of our housing market.

Bob and Donna McWilliams are practicing real estate agents with more than 20 years of combined experience in the Annapolis area. Their Web site is www.BobDonna.com, and you can e-mail them at