Third-quarter data indicates market direction

What word best describes your feelings about our residential market? Would it be depressed, confused, excited, frustrated, optimistic or pessimistic? You may have experienced most, if not all, of these feelings depending on who you listen to or what your favorite media source is dishing out on that particular day. You may even experience opinion swings of 180 degrees, all in the same day.

Can this be possible? Yes. It can happen because we are constantly bombarded with contradictory information and differing opinions, some of which are mutually exclusive. For example, in the past several weeks, one expert gave us the impression that our market was showing signs of hitting bottom, and a few days later another expert said he expected our market to drop another 30 percent. So, with such inconsistency, how can we feel confident in anyone's assessment of the market?

All news seems to be suspect, even if it's accurate. Real estate practitioners are accused of being overly optimistic and self-serving in their assessment of the market. The media is branded with the bias that the world is going somewhere hot in a hand basket, so they are accused of making everything sound worse than it is. Whose opinion can you trust?

If you're smart, you won't trust anyone's opinion, not even your own.

You should do what good pilots do, that is trust the instruments. Talk to any pilot, and they will confirm that when they are flying without a reference to the ground or the horizon (for example, in the clouds), their senses will lie to them, and they can develop vertigo. This can be a costly mistake.

Our market has an instrument panel as well. And like an airplane, it has primary and secondary instruments. The primary instrument for our market is inventory. Inventory acts like a compass in that it tells us the direction our market is going. If inventory is growing, our market is heading toward a buyer's market. If inventory is constant, it means that there is no change in market direction. A shrinking inventory suggests a direction toward a seller's market.

Take a look at our single-family inventory, what do you see? Remember, you're a pilot now, so you must forget what you feel, hope or want to believe. Trusting your feelings and other's opinions could be a costly mistake.

Does it look like our market has hit bottom? According to the chart on this page, there has been a steady growth of homes for sale since the peak of our market, which was during the summer of 2005. If you want to be overly optimistic, you could look at the minor fluctuations that happened this summer, because inventory did in fact decrease by a few hundred homes. But when you compare that with prior years, you will see that that is a normal seasonal fluctuation. An objective pilot would have to admit that our market has not made a change in direction.

The two supporting, or secondary, instruments are ones that predict what the inventory may do in the future. These instruments are the rate of home sales (which reduce inventory) and the number of homes coming on the market in the form of resales, foreclosures, short sales and new homes (which increase inventory).

Home sales are treading downward. Sales through the first three quarters of '07 are down 32 percent as compared to '06 and down 54 percent from the peak year of '05. Last month's home sales were the lowest for a single month since we began tracking data in 1999. And we project the number of home sales for this year will be near the level sold in 2000.

The pipeline of homes coming on the market suggests that inventory has a better chance of growing, not shrinking. According to RealtyTrac, Lee County has more than 6,200 homes in pre-foreclosure, which is an increase of 72 percent since August of this year. Many of these homes have not hit the market yet, so they are not counted in the inventory graph. In addition, there are countless others that haven't even shown up on the foreclosure radar screen yet.

The conveyor belt of new homes for sale is adding to the inventory of unsold homes. However, the good news is that there are a finite number of these homes in production and the end of the conveyor belt is getting closer every day.

Has the market made a turn yet? Not according to the instruments. When will it make a turn? The secondary instruments suggest that it won't be soon. But when it starts turning, I believe it will turn quickly.

Originally published on October 21, 2007 News-Press by Denny Grimes - Research by Michael Polly VP