real estate prices: how predictable?

Here is a chart of recent US residential real estate prices and US commercial real estate prices. Do you notice that the red line peaked and then declined, which was followed by the black line peaking and declining?
With that chart in mind, let’s imagine that there could be such a thing as a leading indicator. A leading indicator would be some measurement that consistently precedes certain consequent developments.
What other data could predict changes in price trends of overall US real estate prices? How about prices of specific subcategories, like selling prices of new homes only in a certain specific region? Isn’t it possible that certain prices (like of new homes only) would drop in a particular region first, prior to an overall drop?
How about this: could future prices be predicted by the recent volume of sales? Could the volume of sales be predicted by the recent volume of pending sales (signed contracts that have not closed yet)? Could the volume of pending sales be predicted by the recent volume of mortgage applications for pre-approval of real estate financing? Could the results of consumer confidence surveys predict things like the volume of mortgage applications or the NAHB rating for traffic of prospective buyers?
National Association of Home Builders

National Association of Home Builders (Photo credit: Wikipedia)

What? Is there really such a thing as the NAHB and do they really track the traffic of prospective buyers? (Yes and, by the way, the NAHB is the National Association of Home Builders.)

So, there are a lot of leading indicators tracked and monitored by conservative investors (and by conservative, I mean those who do research into leading indicators before they invest). For instance, here is a notable report on mortgage applications for “new home” purchases dropping 27% in a single week in 2010: (while applications for “used homes” dropped only 14 or 15 percent that week.)
There is even data tracked for the volume of existing homes listed for sale. So, when sales volume dropped in certain categories, then volume of unsold homes listed for sale started to multiply, what would be natural to expect regarding future prices of similar homes? (I’ll give a real example below.)

First, here is the same chart as before, but with two added lines. Note that I just drew some lines on there, but you can imagine what kind of data could indicate in advance what would happen next in US real estate prices.

On that note, here is something I wrote in October of 2005, right after reading the NAR (National Association of Realtors) report that was released that day to report September 2005 data. (You can see my original comments in full at this link:

“…actual sales are down almost 20% from last month, while excess inventories keep rising. Even more importantly is… price. Look at housing in the west, the most expensive region: down ALMOST 10% from last month. Do you think the rest of the nation will be stable while California prices are tumbling?”

I could have added that the previously booming areas of Phoenix and Las Vegas were also struggling. In fact, I later did in October 2006. Here is a new update regarding Phoenix area real estate.

Date Single Family & Condo
25th Percentile
Asking Price
Asking Price
75th Percentile
Asking Price
03/07/2011 30,053 $85,000 $144,990 $275,000

08/28/2006 27,703                     $255,000$339,000$505,000

09/01/2005 8,030 $269,000 $380,000 $630,000

While some people might be startled to note that the median price has fallen from $380,000 to under $145,000 ( a drop of over 60%- and actually up more than $5,000 since January), next is what I find even more interesting. The inventory of homes listed for sale is still much higher now than in 2006- meaning that the excess of unsold homes listed for sale is currently worse than in 2006 right before prices declined by about $200,000.

So, is there  a shortage yet of unsold housing for sale again in Phoenix like there was in 2005 right before the market collapsed? Nope- not even close.

Now, I offer those examples simply for historical reference. They are not particularly important to me and perhaps not to you either. But here is where it gets interesting….

Consider that the amount of spending for exploration for oil deposits is a leading indicator for discovery oil deposits. Consider that the following chart shows the correlation between the timing of exploration and discovery (as well as extraction and refining):

It is reasonably logical to predict that we can only discover oil that we look for, right? And we can only extract oil that we discover first, right? And we can only refine oil that we extract first, right?

Okay, so now that you are clear on the simple and really quite obvious principle of leading indicators, now let’s look at a chart that is much more important than something trivial like prices for commercial or residential real estate.

That chart shows exactly how discovery peaked in the mid-20th century, with production still rising. But then production (AKA extraction) peaked in 2006:

Now let’s look at that same chart with the main data broken down into two subcategories: non-OPEC production and OPEC-production.

Notice that except in the early 1970s, non-OPEC production has exceeded OPEC production. Now was there anything unusual about the early 1970s in global economics? I was so young; let’s move on….

Around 1985, non-OPEC countries produced about twice as much oil as OPEC countries. The above 1999 chart showed a forecast that in 2008, OPEC countries would match the productivity of non-OPEC countries- now did anything unusual happen in 2008 in global economic patterns? Anyway, let’s look ahead to 2020 or 2040 and consider which countries are currently dominant economically and also consider which ones are predictably likely to rise in prominence- or even become singularly dominant, with 2:1 ratios of oil productivity- or even 10:1 by 2040.

So the US and USSR rose to singular prominence in the 20th century as the #1 and #2 producers of oil in the world. Those two nations were known as “superpowers.” Then, the USSR collapsed a few decades ago.

Is it possible that there will ever be a different global economic superpower than the US? Is it possible that there already is? Is it possible that the US, which now consumes around 25% of the world’s resources with less than 5% of the world’s population, might eventually consume less than 25% of the world’s resources?

Considering that oil extraction peaked in 2006 and may continue down forever, is it possible that even if the US continues to consume 25% of the world’s oil, the total consumption worldwide could eventually diminish- perhaps just a little? For instance, if, in a particular year, all of the oil in the world were consumed in the US, but that was only 1 barrel of oil, then consuming 100% of the world’s total consumption would still only be 1 barrel.

Now, are there any questions about the predictable future prices of suburban US real estate? No? None at all? Not even one?

Maybe I distracted you with that reference to over 30,000 unsold homes listed for sale in the Phoenix area… because you were thinking that you did not see any reason not to own at least 25% of them yourself. Maybe you missed everything else in the article.

I just hope that you got the part about possible leading indicators like mortgage applications and the NAHB index of the traffic of prospective buyers. You do know that all that stuff is going to be on the test, right?

(completely unrelated graph placed here for absolutely no reason:)

First Published on: Mar 9, 2011

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2 Responses to “real estate prices: how predictable?”

  1. Satu Järvi Says:

    Real estate price is been a issue sometime for low home sales,yearly real estate price is been increasing and a lot of agent know about it,thanks for sharing real estate price how predictable i learn so much about it,in Finland most of real estate now a days increase their price for the house i think it is because of low sales for all home.

    • jrfibonacci Says:

      Prices tend to decline as the volume of sales declines. Optimism tends to be reflected in rising prices, for optimism leads to more borrowing and more buying.

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