Housing Market Top? (Not Yet.)

Estimating the general health of a housing market is relatively easy to do, but being precise about it is difficult. Much harder, even in general terms, is identifying the moment of change, the instant a market starts to flatten out, or turn sour.

The standard, widely published, analytical measures of real estate activity are often misleading. It's odd that the biggest single business in the country has the poorest analytical base, but it does.

The information that appears to be the most useful -- statistics on numbers of sales and average prices -- tends to be the least helpful.

For example, Assessor's records (well-reported in the Camera's Business Plus) show about a 20% decline in the number of single family home sales and average prices -- tends to be the least helpful.

In contrary confusion, decreasing unit sales can reflect an accelerating market, as scarce listings create price pressure but few sales. This backwards pattern applied to Boulder in 1993. On the other hand, a rapid increase in the number of sales can be caused by sellers scrambling to sell, soaking up buyer demand all at once just as prices flatten out.

Changes in "average sales prices" don't necessarily describe a generally rising or falling market. The average price is easily distorted by changes in the mix of that which has sold, and say nothing about changes in the value of a particular home or neighborhood. The sale of a few million dollar houses will make the average price seem to skyrocket. Median analysis tried to remove this distortion, but doesn't: a temporary surge in starter home sales will make prices appear to drop.

An entirely different type of indicator relies on no hard data at all. When Federal Reserve economists use this one in a formal, monthly report, they dress it up with a fancy name, "anecdotal evidence." Anecdotal evidence is story-telling: "I was havin' a beer with Fred over at First National, and he said he heard that loan demand was 'way up". (No kidding: the Fed publishes regional banking stories each month in a report called the "Beige Book.")

War stories among brokers is a wildly imprecise analytical method, but tends to be up-to-the-minute, has no data collection time lag, and describes the "feel" insiders have for a market.

The broker-to-broker chatter after the holiday, with some tone of surprise, continues to be "buyers everywhere ... nothing to show ... good stuff sells in a heartbeat." Slightly softer than the last two years: "there are offers accepted under list price ... we have had to reduce some asking prices ... fewer competing offers ... a few more overpriced home."

Appraisers are a source of worthwhile hard information, but it is often too specific, as appraisers are limited to individual homes. Also, though appraisal purport a value as of a current date, the value is based on sales as many as six months old.

By the end of 1993, anecdotal evidence from appraisers said values were growing by 1-2% per month, depending on where you were in the County. They are probably right, but they can only prove it one house at a time, three hundred bucks a throw.

Is there any way to tell where the whole market is going? Any good way to know whether now is the time to cash in? For a buyer to tell if it's time to cool it and see what else comes on the market? Or bid up above list?

There is one analytical tool that works. You can't look it up in the paper, or anywhere else, without the help of a Realtor (at least until there is a change in rules limiting access to Multiple Listing Service data). The best leading indicator for a whole real estate market, or a segment, or a particular home is the shifting relationship between listings available and the number of sales of similar properties.

Here is the math behind "inventory to sales ratio" analysis. For the price range and location of the home you want to buy or sell, add up the number of sales into the number of listings.

If you get an answer less than one, there is less than a one year inventory of homes available to support sales. When the available supply is 90 days or less (12 houses available, 48 sold in the prior year), the market is in a feeding frenzy of some kind, usually appreciating way above the inflation rate. When there is more than a one year supply, or stretching out to three years, there tends to be an ordinary, pokey, inflation-appreciation market.

In 1983, in higher price ranges, the inventory to sales ratio hit ten years, an excellent indicator of the sorry market to come.

In case you were wondering, there is no sign of listing inventory accumulation in any segment of the Boulder County market. But you might want to keep an eye out.