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We haven’t gone over the specific market data since July. Let’s take this opportunity to go over our local housing market indicators for the East Bay of the San Francisco Bay Area. One of the indicators that can give us a very good idea of the pace of the selling activity is the Sale-to-Inventory Ratio (STIR). When the STIR is rising, the sales are going at a faster pace than the inventory build-up. And, that’s exactly what happened from November 2004 through this April – see Chart 1. If you were a seller that would’ve been the best time to market your property for sale. When the STIR is falling, the sales are outpaced by the inventory build-up. It makes buying a lot easier for the buyers during this downtrend of the STIR. Currently, the STIR has been in a downtrend since April. This is one reason I’ve also referenced this indicator as a great “Market Timing” indicator. Whether you’re selling or buying, you’d want to follow the STIR Cycles in order to maximize your profit or your budget.
Now that we’re aware of the slowdown in the selling activity, I’m curious about the Market Sentiment. How do people feel about real estate? For that, we’ll turn to my Housing Market Sentiment Indicator, which is the monthly number of the MLS participants. But before looking into the number of MLS participants, I’d like to show you the percentage change of the membership from the preceding month. Since there are record number of people joining the MLS every month for the past 6 months, looking at just the number of participants may be misleading. While the number of MLS participants has been increasing every month, the percentage change from the previous month has been declining. In the month of August, the increase of the MLS participants from July was only 1.32%, which is the lowest rate of increase since December 2003. That’s a 20-month low.
Numbers in relative terms always provide us with much better insight than the absolute numbers. Let’s take a look at Chart 3, for example. The absolute number of the MLS participants shows another record month in August. The membership number increased to 4,973, and the chart clearly shows a continuous uptrend since November 2004. However, what’s hidden behind the edifice of the record membership number is the fact that the rate of increase has been in a steady downtrend. This indicates a gradual and subtle disappearance of the bullish sentiment in the housing market.
As I’ve mentioned before, more people would get into real estate business – obtaining licenses and joining the local MLS - when they “feel” real estate is where the money is. When this number tops out (stops rising to new highs), then we’d know that the sentiment has changed. And, the declining rate of the membership increase serves as a leading indicator of that sentiment change. Hence, it’s safe to assume that people have finally started to “feel” something’s wrong with the housing market although I’ve been writing about all the subtle changes that have been taking place for over a year now. Next, let’s examine the Internal Strength of the market by first taking a look at the number of withdrawal listings. When a listing’s withdrawn from the market, it usually means that the seller simply gives up. And, that’s not a good sign for the housing market if this number is growing. On Chart 4, you can see the number of withdrawal listings declined from September 2004 through December 2004. It then stayed flat for about 3 months before it started turning upward in April. This means the internal strength of our housing market started to deteriorate in April. This matches the STIR (Chart 1) timeline of the sales slowdown. It’s important to see indicators confirming each other. This type of confirmation validates our technical analysis.
In any case, this then raised an interesting question. If the sales were slowing down and more listings were withdrawn from the market, then what happened to these properties? Did they turn into rental properties? One myth is that the slowdown in sales helps the rental market. Recently, this is what motivates many investors to buy stocks in apartment REITs. Let’s take a look at the rental market data and see what the language of the rental market tells us. Chart 5 shows the monthly number of properties rented through the MLS system. One reader suggests that I separate prior year’s data with different shade or color, and that’s what I’ve done here. The gray bars represent last year’s data. This data set, by all means, does not include rental transactions arranged between private parties. As per the local MLS system, there were 128 units rented in the East Bay in September. This is fewer than the 154 units rented in the same month a year ago. The 128 number of units rented was also the lowest since March this year.
Obviously, there’s no positive correlation between the number of withdrawals and the number of rental properties, and the rental market didn’t seem to pick up even though the sales have slowed down. Why? This rental market condition is probably more intriguing and telling to me than the sales statistics, and I’ll try to expound on it further in the future. For now, let’s stay focused on our analysis. Another one of my favorite Internal Strength indicators is the Price Reduction Index (PRI). By the way, one reason these are my favorite indicators is that they measure the market’s internal well beings that are not visible to most people, including the professionals. Knowing these indicators gives me the objective and profound understanding of the condition of the market. I don't have to "feel", and I don't have to argue baselessly about the current state of our housing market. The PRI, as I've repeated explained in the past, is the difference between the number of listings that increase asking prices and the number of listings that decrease their asking prices. When more sellers reduce their asking prices in order to move their properties, it’s the sign of weakness in the market’s internal strength. This PRI chart (Chart 6) displays exactly such weakness. The thick black line is the 10-day moving average, and the thin gray line is the daily fluctuation of this data. The PRI started trending higher around the end of March and the beginning of April (black arrow), which means more listings had their original asking prices reduced starting in March/April. This, too, confirms the STIR timeline. This indicator is currently trending much higher than the old high in July 2004 (red arrow).
So far, we’ve looked at the sales, the sentiment, and the internal strengths of our housing market. Let's see how the price is affected by these indicators. Chart 7 is my Sold & New Listings Median Price Comparison chart. 10-day simple moving average is applied here to smooth out the daily price fluctuation. Anything Blue represents the daily New Listings, and Red represents the daily Sold listings. The unique feature about this chart is the 2 different timelines. The timeline in blue letter (new listings) on the top lags behind the timeline in red (sold listings) by a month. Therefore, the $578,000 sold median price on 9/30/2005, for example, was compared to the $588,000 median price of the new listing that came on the market a month ago, on 8/30/2005. It takes about a month for a new listing to be marketed and finally sold. This time lag is based on average days on the market statistics. Should the market condition change in the future, this lag time will then be adjusted accordingly. As explained in detail previously, when the Sold listing median price maintains a large gap (see X marks) below the median price of new listings, it means that the asking price of the new listings is much higher than what the buyers are able and willing to pay. And, in order to get their properties sold, the asking price must come down to meet buyers' demand. This is why the blue curve tends to drop down following the gaps. Lately, the new listings' asking price dropped down again to fill the gap, but the problem is that the sold price also took a dip. The price of the new listings (blue curve) has dropped considerably - from the $610,000 level to the $590,000 level. You can see that $610,000 seems to be the blue curve’s price ceiling (resistance), and $590,000 appears to be the red curve’s ceiling. Buyers seemed unable or unwilling to go any higher than $590,000. So, after going sideways along the $610,000 resistance for a few months, sellers finally gave in and came down to the $590,000 area. But then, as the sellers started moving their asking prices lower, buyers also moved down another notch, from the $590,000 level to $580,000. The sold median price was $578,000 as of 9/30/2005, which is $10,000 below what the sellers wanted ($588,000) when they put their properties up on the market as new listings a month ago, on 8/30/2005.
Two things could happen from here. One is that buyers could move even lower from this point to form another new gap. This would mean that there’s no meeting of the minds between buyers and sellers, which then would slow the sales further. Another possibility is that, by lowering the asking price, sellers could entice some buyers to come back to the market. This may rekindle buying activities in the final months of the year as it did in April/May. The drastic fall of the asking price following the gap (first X mark on the left) in April/May did entice the red curve to move upward for a couple of months. I’ll let you know which way it turns next time.
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