I am not too familiar with the lag time issue for the median, so I can’t add anything meaningful in that regard. My experience (anecdotal evidence) was that the market changed in July of last year. That said, there were many, many sales in the fall that continued to set records for the various communities in which they were located. There were some sales that were lower, and some homes were just pulled from the market, but I can honestly say that the market activity that I saw was erratic. There was still considerable buyer confidence in the market, and many people still payed top dollar for homes.
In January and February, sale occurred as is the historical trend. March saw an increase of sales and into April. BUT THEN, the numbers of sales on the records clearly show that buyer confidence/willingness was lacking because sales have declined each month after that initial rally.
I’ve run the numbers, and the number of additional homes on the market each month was not significantly different that the historical trend. However, the drop in sales activity meant that month after month, the inventory has climbed. That had been occurring since January of 2005, but the significant drop in sales gave a hockey stick jump to the inventory this spring. This overnight jump in inventory by 50% was not missed by buyers, and the talk on the street has not stopped since.
So, here’s my point (or what’s my point, maybe)….For the second half of 2005, it was not possible to determine exactly what was going on in general because the data points were a scatter graph. One neighborhood was rallying while another was falling. I can think of one Carlsbad neighborhood in particular whose prices had risen too close to a nearby new construction area, and the result was that all sales stalled (because you could buy a new home for just a bit more), and once they stalled, some sellers got nervous and discounted and that started a slide in that ONE neighborhood. Meanwhile there could be a record price set just a few miles away.
There were many of us who thought the spring rally would burn off some of the excess inventory, and things would remain stable. What is interesting is that some geo/price segments HAVE remained stable and have more inventory than 2 years ago, but it’s not a code red situation. I really like the Months of Inventory calculation better than Median Price because I can see what is happening in different geo/market segments at the same time and have a meaningful comparison.
For example, here’s the Months of Inventory for a couple of markets which are good talking points:
Carlsbad
<600K 8 months of inventory
600-750K 6 months of inventory
750-$1M 7 months of inventory
$1-1.25M 9 months of inventory
>$1.25M 24 months of inventory
Vista
<600K 6 months of inventory
600-750K 9 months of inventory
750-$1M 8 months of inventory
$1-1.25M 18 months of inventory
>1.25M 70 months of inventory
Escondido
<600K 8 months of inventory
600-750K 9 months of inventory
750-$1M 13 months of inventory
$1-1.25M 16 months of inventory
>$1.25M 35 months of inventory
It is pretty clear to me, that of the three, Carlsbad is the healthiest, with it’s high price point at 24 months of inventory. If I told you that there are 52 homes in Escondido’s high price point, but it has had only 1.5 sales per month in that bracket, it becomes pretty obvious about what it takes to be the one-out-of-50 that will go into escrow this month. Meanwhile, look at Vista, with its 6 months of inventory at the low end…that’s 187 homes on the market today with an average sales rate of about 29/month. I think that’s pretty healthy, and I would expect that the low end segment of one of the lower-end
markets to remain healthy even while its high end goes off the charts.
Watching these numbers change over time makes it clear to me that median sales price may not be a good indicator simply because it is too coarse a measure. It doesn’t allow one to see into the specific micro-markets that you need to examine for decisioning purposes. If a buyer needs to move here, you can show these numbers, and they help explain, in pretty clear terms, I think, where the short term risks lie in terms of value adjustment. I’m not saying that the low end in Vista might not adjust down a few points, but it is clear to me that the risks in buying in that market are one helluva lot less than the risks of buying in upper end Escondido. I’ve made the point in other posts, but the Months of Inventory indicator shows, pretty clearly, that the Inland markets are in a far more precarious position as we enter the fall than the Coastal markets. I do not believe that the correction that we are about to see will be evenly distributed because the inventory buildup is not evenly distributed.
In summary, I like the median as a way of getting a coarse idea of what’s happening, but I think it should be avoided as any sort of decision-making tool. If you have a better indicator, please tell us about yours.
As a final note, I’d like to say that my median price indicators have shown that Encinitas, strangely enough, has already experienced a correction while the other communities like Escondido have not. The other side of that coin is that Encinitas has one of the healthiest inventory levels compared to its neighbors. So, while some of its neighbors have, for the short term, been able to maintain the median price for sales, they have teed up a situation where the abundance of inventory could result in a sharper correction. I think I prefer the more-stable Encinitas situation because buyer confidence isn’t completley lost as it might be in other areas this fall.
