The Problem With Using Prices as a Market Turn Indicator
An article this week at Fortune.com, titled The one number to watch for a housing recovery, speaks to the reliance on home prices to try and call a market turn. In the last few months, many economists have concluded that the housing market may indeed have turned and is in a healing mode. Many would doubt this, especially if they’re using home sale prices as the indicator of a market trend change.
From 2006 through 2010, median home sale prices nationally fell an average of more than 30%. They dropped another 4% in 2011, ending the year at a 10 year low. And, even the economists sensing a change in direction will admit that prices aren’t likely to rise for some time to come. Some market analysts are telling their clients that higher prices will not be the sign of a turn in the market, instead saying that we should be paying attention to the recent pick-up in the number of sales.
Their reasoning is that home prices tend to be a lagging indicator, sometimes taking six months or longer to show in the market. Even if listing prices are rising, it can take months to sell and close the home deal, and the sale price will not be reported until that closing. Thus the sold price for a home is actually reflective of the market months earlier.
Indeed, looking at the number of home sales, these are the numbers that have economists predicting we’ve turned the corner:
• increase in the number of sales from 2010’s 4.19 million to 2011’s 4.26 million.
• in the past six months, total number of homes sold has risen by 13%.
If this trend continues, it is expected that prices will follow in an upward trend as well. For real estate investors who have loaded up on rental properties, the increase in equity will be a welcome boost to their portfolios.
An article this week at Fortune.com, titled The one number to watch for a housing recovery, speaks to the reliance on home prices to try and call a market turn. In the last few months, many economists have concluded that the housing market may indeed have turned and is in a healing mode. Many would doubt this, especially if they’re using home sale prices as the indicator of a market trend change.
From 2006 through 2010, median home sale prices nationally fell an average of more than 30%. They dropped another 4% in 2011, ending the year at a 10 year low. And, even the economists sensing a change in direction will admit that prices aren’t likely to rise for some time to come. Some market analysts are telling their clients that higher prices will not be the sign of a turn in the market, instead saying that we should be paying attention to the recent pick-up in the number of sales.
Their reasoning is that home prices tend to be a lagging indicator, sometimes taking six months or longer to show in the market. Even if listing prices are rising, it can take months to sell and close the home deal, and the sale price will not be reported until that closing. Thus the sold price for a home is actually reflective of the market months earlier.
Indeed, looking at the number of home sales, these are the numbers that have economists predicting we’ve turned the corner:
• increase in the number of sales from 2010’s 4.19 million to 2011’s 4.26 million.
• in the past six months, total number of homes sold has risen by 13%.
If this trend continues, it is expected that prices will follow in an upward trend as well. For real estate investors who have loaded up on rental properties, the increase in equity will be a welcome boost to their portfolios.