Crystal Ball Finance: The Art Of Predicting Housing Market Trends

Recently, how many people have you heard say “I’m just waiting for the housing bubble to pop?” My guess is: a lot.

It seems like these days, every average non-house-owning Joe and Jane seem to be brilliant economic pundits; with their uncanny housing market clairvoyance, it must be that all of today’s homeowners are suckers. If they really know what’s good for them, suburban America should stampede their realtors and sell, sell, sell! They should take their winnings from their house, move to an apartment, wait for the bubble to pop, and buy back their old house for 50% of what they sold it for, all the while laughing at those who kept their houses and were financially trampled over.

Are Joe and Jane that smart? Probably not. In all likelihood, they just simply recited what they heard from Harry and Sally (who heard from Tom, Dick, and Jane) at the last neighborhood barbeque. The goal of this article is to give you an idea of how the pros do their forecasting. I’m just going to give you three basic statistics you can listen and watch for and allow you to make your own decision on trend progression.

1. CHMPI

The first metric for you to look at is Freddie Mac’s Conventional Mortgage Home Price Index (CMHPI). You can get this information at Freddie Mac’s website. What this index does is measure how much housing prices are going up or down. The exact details of how to calculate the index is beyond the scope of this introductory article; what I want you, the readers, to look at is the quarterly growth rate of the index.

To give you an idea, the CMHPI has had double-digit percentage increases every quarter since the second quarter of 2004; before this, we have not seen double-digit increases since the fourth quarter of 1979. Here are the growth rates for the most recent years:

2004 Q1:8.50
2004 Q2: 10.00
2004 Q3:13.23
2004 Q4:12.01
2005 Q1:12.94
2005 Q2:14.00
2005 Q3:12.66
2005 Q4:13.22
2006 Q1:12.67

Looking at this metric alone, we can see that, while growth rates are lower than their peak, they still remain high. For reference, the average growth rate throughout the life of this index (since 1971) is 6.32.

2. Housing Starts

Next, we want to look at the new residential construction statistics (a.k.a. housing starts) released by the US Census Bureau and the Department of Housing and Urban Development. This information is available at the census bureau’s website. This lets us know if the real estate developers are actually still building new houses and how fast they are building them. If this number is going up, the common belief is that developers are likely seeing an opportunity to make some profit.

For example, in June 2006’s release, single-family housing starts (houses where construction had started) went down by 6.5% relative to May’s numbers. Single-family authorizations (approval on new construction) went down by 4.3%.

3. Existing Home Sales

The National Association of Realtors releases existing home sales statistics. This is just a way of gauging how well homes are selling. If this number is going down, then supposedly people are having a tougher time selling off their houses, which should in turn mean that prices will get cheaper soon.

In 2006, the existing home sales went down by 8.9% versus 2005. June’s existing home sales went down by 1.3% versus May 2006.

4. Other people’s Commentaries

OK, I understand that most people have no time to analyze all of these statistics. The easiest thing to do is to read commentaries from a few credible economic experts. These guys have a lot of experience in the real estate market and spend a good portion of the day following up on the latest economic data. One place with some good commentaries is the mortgage finance market commentaries section at the Mortgage Bankers Association website. There are also some great blogs on the internet focused on housing market trends.

Hopefully you now have more knowledge on housing market indicators and, at the next neighborhood barbeque, you can throw around some fancy statistics and impress Joe and Jane.