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Real estate market is regional, and as I’ve mentioned in my previous article that my analysis is based on two counties in the San Francisco Bay Area that are among the top 10 most populous counties in the most populous state of California. While this does not represent the entire housing market, the size of this metropolitan area may help shed some light on the well beings of the housing market. In addition to the daily collection of the market data, I also compile monthly housing market sales data. I had to re-check my data for accuracy when I saw the record shattering dollar volume of sales in June. The $2.516 billion in total sales was not an error; that’s just the fact. This was accompanied by a strong surge in total number of units sold in June.
Chart 2 shows 3,684 housing units sold in the month of June, which was a 19.26% increase from a month ago and only about 3% shy of last June’s record of 3,803 units.
And, in addition to the daily and the monthly local statistics, I also collect national housing market related data. Since mortgage and real estate sales activity go hand in hand, I like to cross reference with the latest Mortgage Bankers Association’s nationwide mortgage application volume statistics. Chart 3 shows last year’s Purchase Loan Application Volume record of 500.9 was taken out in the beginning of May this year, and May’s record was immediately broken by the all-time volume index high of 529.3 in the beginning of June. The national statistics seem to be in sync with the local data. Both of them indicate a strong housing market in the month of June.
So far so good except for one problem. The problem is that all of these data are HISTORY. They have nothing to do with the sales activities in June. As I’ve also mentioned in my June 26 real estate analysis, a typical real estate transaction takes one to three months to complete, and that’s the amount of time required for a new listing to be converted to a sold listing. W must keep in mind that June sales were the result of all the sales activities generated in May, April, and perhaps even March. This is why the final sold statistics reported in June has nothing to do with June’s activities. June’s sales activities (i.e. marketing, showing, offering, negotiating, inspections, escrow, etc.) will be reflected in July, August, or even September’s reports. The same principle must also apply to March, April, and May’s solid performances; they’re the results of strong sales activities originated in December, January, and February. This time lag is one of the most important concepts in interpreting the real estate sales data. Unfortunately, it hasn’t been recognized by analysts, real estate professionals, and sellers and buyers alike. And, the failure to recognize this had caused investors to trade on the wrong side of the market, sellers to miss the most profitable market timing, and buyers to rush into the market when they should’ve waited. In any case, while it’s necessary to study the past, we would also like to study the current data in order to gain some insight into the future. Before we move on to the most up-to-date indicators, let’s take one more look at Chart 3. You may’ve already noticed signs on this chart that are not consistent with June’s strong showing. The lower high in the beginning of July and the lows (red circle) that repeatedly broke below the trendline (black arrow) are visible signs of weakness. Let’s see if this “up-to-the-day” chart of Supply and Demand could give us more clues. Nothing gives us a better “almost” real-time supply and demand picture than tracking the daily new listings that come on the market (supply) and the daily pending sales that come off the market (demand) every single day. The number of new listings, the supply, on Chart 4 has been trending higher since after the New Year (red line). It only fell below the trendline once on 7/5/2005 (black circle), the day after the Fourth of July weekend. This may not be considered as a trendline break since inventory level usually drops sharply right after the long holiday weekends. Meanwhile, the daily pending sales, the demand, seemed to have topped out right at that 200-unit resistance (green arrow). This divergence indicates weakening of the market’s internal strength.
Another way to gauge the internal strength of the market is to track the cumulative difference between the number of listings with price reduction and the number of listings with price increase every single day. Generally speaking, housing market has a built-in bias toward price reduction. In practice, most sellers don’t increase their asking price once their properties go on the market for sale. This is particularly so in a hot housing market where the properties get sold right away at prices much higher than the original listing (asking) prices. The market force pretty much takes care of the price increase part for the sellers. And, placing the emphasis on the Advancing Issues (price increase) may not reflect true market condition. Just like the A-D Line used for stock market breadth analysis, the numbers on my Decline-Advance Line chart is not important, but the trend is. And, unlike the stock market indicator, the higher my D-A Line climbs the weaker the market becomes. This means the number of properties with price reduction is outpacing the number of properties with price increase. It’s definitely a sign of the internal weakness. And, that’s exactly what’s shown on Chart 5. The D-A Line had really turned up sharply since the end of May and the beginning of June (blue arrow).
What happened to the combination of the peaked demand and the accelerated number of properties having to reduce their original asking prices is the inventory build-up. Chart 6 shows that the inventory of available properties for sale had been in an uptrend since it hit the trough right after the New Year. The uptrend then turned up sharply in the beginning of July, apparently, as a result of the peaked demand (Chart 4) and accelerated number of properties with price reduction (Chart 5) in June. As of Friday, 7/15/2005, the inventory level had not only surged way past last July’s record of 4,263 units, but it had also broken the 5,000-unit mark for the first time. I would consider this a significant technical breakthrough that could be contributed fundamentally to the sellers and/or real estate agents’ misinterpretation of June’s sales data. Without taking into account the time lag, the strong June sales statistics may have prompted sellers to rush into the market. One other significant technical observation is that last year’s inventory build-up was on a much smoother trendline than this year’s sharp ascend.
So, here we are in the middle of July, and we observe some pretty consistent technical weaknesses that have been in the making for the past few months. Again, please keep the time lag in mind. Can we safely surmise that the market is due to roll over from this point on? While it’s obvious that the market strength has deteriorated further from a year ago, I would not draw any conclusion until I’m certain the seasonal factors have been ruled out. Contrary to the general consensus, June through September is traditionally slow season for home sales (think time lag). I would have to see stronger technical indicators that simply eliminate any doubt of such seasonality before any conclusion can be drawn. As far as the "housing bubble" is concerned, I don’t know if we’re in a housing bubble because I can’t see it technically, and I can’t find any historic references from the tables that I’ve provided in my June 26 real estate article. The only thing I know for sure is that what goes up must come down. I know home prices can not go up “forever” because nothing does. Eventually the housing market too must go through a period of price corrections. Other than that, I’d rather turn to the market for information. If the housing market’s in a bubble, as many experts and non-experts have vehemently insisted, I often wonder how the eventual “bursting” process would take place. Would it go down like the stock market crash that every share owners suddenly decides to sell off? Would every homeowner suddenly decide to become homeless and sell his or her home through some major exchanges? For homeowners who are capable of making mortgage payments, why would they want to suddenly become homeless? And, what could be such exchanges to facilitate the sell-off of homes all at the same time? And if it’s not a crash scenario, then would a gradual selling process occur over a period of time qualify as the price correction or the bursting of the bubble?
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