Signs the Market is Changing
Hot real estate markets don't stay hot forever. In some areas around the country, the home sale market has already slowed after being robust for several years.
For years, the unsold inventory index has been used to predict which way the market and home prices were moving. The unsold inventory index reports how many months it would take to sell the existing inventory of homes for sale at the current sales pace.
Changes in the unsold inventory index are directly related to changes in supply and demand. When the demand for housing goes up, the pace at which homes sell accelerates and the existing inventory of homes for sale decreases. As inventories shrink, prices often go up as more buyers compete to buy a limited number of listings.
When demand for housing goes down, it takes longer for homes to sell. Inventories tend to rise, as does the unsold inventory index. In this sort of environment, prices may decline.
Recently, the unsold inventory index has been at an all time low nationally. However, national trends don't necessarily tell you much about the pace of your local real estate market.
The local economy, particularly the job market, has a direct impact on the local housing market. People who lose jobs don't buy houses; in fact they often sell. In areas where job growth is strong, you often find a strong housing market. On the other hand, over-building in an area can also lead to excess inventory, which can put a downward pressure on prices.
The National Association of Realtors tracks existing home sales on a national and regional basis. These figures are often quoted in the media. However, existing home sale figures aren't necessarily a reliable predictor of the direction of the housing market because they are based on closed sales. Home sales typically take 30 to 60 days to close. The Existing Home Sale Index measures past sales activity. It doesn't tell where the market is going, or even where it is today.
On March 7, 2005, the National Association of Realtors unveiled a new diagnostic tool that will be much more useful in determining the future direction of the residential real estate market. The new Pending Home Sale Index, which will be released the first week of each month, measures home sales based on the date the sales contract is accepted rather than on the date the sale closes.
NAR touts the PHSI as a "leading indicator" of future home sale activity. However, like all tools used for predicting the future, the PHSI has its limitations. For one thing, a certain number of pending sales fall apart and never close. Even so, NAR analyzed existing home sales and pending home sales for the period from 2001 through 2004. For that period, the two sales indices tracked very close to one another with pending home sales lagging 2 months behind existing home sales.
Another shortcoming is that, like all national statistics, the PHSI is of limited usefulness on the local level. To compensate for this defect, it's helpful to look at the relationship between the number of new listing and pending sales in your locale. Analyze the statistics for one month, and then compare this to the statistics for two and three months ago. Your real estate agent can assist you with this.
THE CLOSING: When there are more pending sales than available listings, this indicates a high demand market, and one that is likely to put upward pressure on prices. When there are more listings than pending sales, this indicates a softer market.
Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
Copyright 2005 Dian Hymer
For years, the unsold inventory index has been used to predict which way the market and home prices were moving. The unsold inventory index reports how many months it would take to sell the existing inventory of homes for sale at the current sales pace.
Changes in the unsold inventory index are directly related to changes in supply and demand. When the demand for housing goes up, the pace at which homes sell accelerates and the existing inventory of homes for sale decreases. As inventories shrink, prices often go up as more buyers compete to buy a limited number of listings.
When demand for housing goes down, it takes longer for homes to sell. Inventories tend to rise, as does the unsold inventory index. In this sort of environment, prices may decline.
Recently, the unsold inventory index has been at an all time low nationally. However, national trends don't necessarily tell you much about the pace of your local real estate market.
The local economy, particularly the job market, has a direct impact on the local housing market. People who lose jobs don't buy houses; in fact they often sell. In areas where job growth is strong, you often find a strong housing market. On the other hand, over-building in an area can also lead to excess inventory, which can put a downward pressure on prices.
The National Association of Realtors tracks existing home sales on a national and regional basis. These figures are often quoted in the media. However, existing home sale figures aren't necessarily a reliable predictor of the direction of the housing market because they are based on closed sales. Home sales typically take 30 to 60 days to close. The Existing Home Sale Index measures past sales activity. It doesn't tell where the market is going, or even where it is today.
On March 7, 2005, the National Association of Realtors unveiled a new diagnostic tool that will be much more useful in determining the future direction of the residential real estate market. The new Pending Home Sale Index, which will be released the first week of each month, measures home sales based on the date the sales contract is accepted rather than on the date the sale closes.
NAR touts the PHSI as a "leading indicator" of future home sale activity. However, like all tools used for predicting the future, the PHSI has its limitations. For one thing, a certain number of pending sales fall apart and never close. Even so, NAR analyzed existing home sales and pending home sales for the period from 2001 through 2004. For that period, the two sales indices tracked very close to one another with pending home sales lagging 2 months behind existing home sales.
Another shortcoming is that, like all national statistics, the PHSI is of limited usefulness on the local level. To compensate for this defect, it's helpful to look at the relationship between the number of new listing and pending sales in your locale. Analyze the statistics for one month, and then compare this to the statistics for two and three months ago. Your real estate agent can assist you with this.
THE CLOSING: When there are more pending sales than available listings, this indicates a high demand market, and one that is likely to put upward pressure on prices. When there are more listings than pending sales, this indicates a softer market.
Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
Copyright 2005 Dian Hymer
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