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The inventory of available properties for sale in the East Bay of the San Francisco Bay Area has been rising since the beginning of the year. Its parabolic ascend kicked up another notch after it hit the 5,342-unit mark on Aug. 1, 2005 (see Chart 1).
However, the monthly new listings chart (Chart 2) shows that the number of new listings has been in decline after it reached 6,161 units in August.
The daily new listings chart (Chart 3) also shows declining number of daily new listings since mid October (red arrow). The housing market has thus presented us a very intriguing divergence. We have a parabolic rise in the listing inventory while the new supply of listings has been in retracement. And, just to thicken the plot, there have been more listings withdrawn from the market than ever, which is supposed to reduce the inventory. The number of withdrawals in October was 144% more than the same month a year ago. And it doesn’t seem to be slowing down anytime soon. Chart 4 shows that the number of withdrawals took a steeper turn to the upside in July (x mark) and started trending up and away from the blue arrow trendline. The widening distance (red arrow) between the blue trendline and the number of withdrawals indicates acceleration of the growing number of properties withdrawn from the market.
From the technical analysis point of view, this type of divergence foretells what things to come. The market is sending us signals that the diminishing supply of new listings would eventually lead to decline in inventory. The increasing number of properties withdrawn from the market also helps to reduce the inventory level. It just hasn’t happened yet. The advantage of the technical analysis is that sometimes we can pick up these divergences before things actually happen. At any rate, since our housing market is far from collapsing (more on this later), this reduction on the supply side of the equation may lead to a reversal of the recent slowdown. Chart 5 shows the difference between the 5-day moving average of the daily new listings (green curve) and the daily pending sales (red curve). The black double arrow on the right is shorter than the one on the left. This means as of 10/31/2005 the gap between the new and the pending listings is narrower than in the beginning of October. If the number of new listings (green curve) continues to decline as it has been per charts 2 and 3 above, there’s a good chance that the demand may eventually catch up with the supply again. And, looking at Chart 5, it would appear that this process may have already started. This may stimulate the housing demand in the final 2 months of the year. One of my favorite indicators has already started showing signs of such revival.
I used this Sale-to-Inventory Ratio (STIR) indicator in my September report to measure the pace of the selling activity. For new readers who haven’t read my past articles, here’s a brief explanation about this indicator. When the STIR is rising, the sales are going at a faster pace than the inventory buildup. This was the case from November 2004 through April 2005 (see red arrow on Chart 6). 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 buildup. It makes buying a lot easier for the buyers during this downtrend of the STIR. And, that’s what happened from April through September this year (blue arrow on Chart 6). But then, something funny happened on the way to the Halloween party. The STIR moved up after it hit the September low of 1.008 (see short red arrow on Chart 6). This September low happened to match the November 2004 low. The fact that the STIR didn’t go under 1.008 before it turned up indicates 1.008 as a strong support for the STIR. Incidentally, one of the reasons that our local housing market’s far from collapsing is that the STIR has never fallen below 1 (red horizontal line). The STIR ratio at 1 is where the sales and the inventory buildup are moving at the same pace. When most of the action takes place above 1, it indicates that overall the sales are still outpacing the inventory buildup, notwithstanding all the short-term ups and downs.
It’s always important to seek confirmation on significant technical breakthroughs. Let’s compare sellers’ asking prices to the final sold prices and see what we can come up with. First thing on Chart 7 is that the final sold price is still higher than the asking price; all the action is still taking place above $0. This means buyers are still paying more than what the sellers are asking for even though the market has slowed down somehow. In October, buyers paid, on average, $8,000 more than the sellers’ asking prices. The advantage still went to the sellers. This advantage, nevertheless, was dissipating very quickly before October’s uptick (blue arrow). The difference between the asking price and the final sold price had dropped from $24,000 over the asking price in April to just around $5,000 over in September. That’s a drastic decline of almost 80% in just 5 months. At the time, it seemed to be going straight down to $0, and possibly under $0. But a sharp decline like this from April to September usually means that the pendulum was over swung. And a rebound would usually follow as buyers returned to the market and began to take advantage of the situation. This caused the final sold price to increase from $5,000 over the asking price to $8,000 over in October. The best way to see this interaction between buyers and sellers is by way of my exclusive Sold & New Median Price Comparison Chart.
As explained in depth in my previous articles, there are 2 different timelines on my Sold & New Median Price Comparison chart (see Chart 8). For my new readers, the timeline in blue letter (new listings) on the top lags behind the timeline in red (sold listings) by a month because it takes, on average, about a month for a new listing to be marketed and finally sold. A 10-day simple moving average is applied to this chart to smooth out the daily price fluctuations. Anything Blue represents the daily New Listings, and Red represents the daily Sold listings. When there’s a large gap between the median prices of the sold and the new listings, it means there’s no meeting of the minds between buyers and sellers. As a result, either sellers would eventually have to move their asking prices down or buyers would have to move their offering prices up in order to make the deals. When we visited this chart in September, we saw the gap narrowed to almost non-existent (see black circle). This means that after a couple months of staying up in the $610,000 price range, sellers (blue curve) had finally decided to come down on their asking prices in September hoping to get buyers interested in buying again. I mentioned that 2 things could happen from there in September. One is that buyers could move even lower from that point to form another new gap. The 2nd possibility is that, by lowering the asking price, sellers could entice the buyers to come back to the market.
The latter appeared to have occurred. Buyers did come back and started pushing the final sold prices higher (black arrow). Sellers then raised their asking prices again to the $610,000 level before backing off a little in October. For now, this has helped keep the sales price afloat, which in turn has prevented the market from going under. If this holds up, we may have a descent finish to end the year. If it doesn’t, then I’ll be here to tell you all about it as the market turns.
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