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powayseller
ParticipantI haven’t seen a model yet that actually works, and they all miss the supply issue. Maybe the data is too hard to get.
What I’m looking for in a model is the inflection points. I’d like to know within 1 quarter if the market is turning. What is the leading indicator to show the market is going from high to low, or low to high? Once the market has turned, it keeps going in its new direction for 5 – 10 years, so the need for the model fades.
Let’s look at the inflection point [inflection point = time when prices reversed] for this current cycle. Prices peaked for condos in spring 2004, when inventory was 3,000. By June, inventory was 6,000, and by Sept 04, it was 12,000. The ripple effect took a little over one year to work to SFH, which peaked in August 05.
jg, could you check into this? Did prices fall as inventory rose? Did sales fall at that time also? If sales is a proxy for inventory, the summer of 04 should prove it.
My guess is that sales do not change enough at inflection points to signal the price reversal. I can think of situations where prices are pressured down to increased inventory, even though sales stay flat (such as rising foreclosures, unemployment). I know the inventory data is hard, if not impossible to get, and that’s why nobody is using it. However, my theory is that the model’s accuracy could be improved by using supply.
Another question about the model: what does it tell us that is better, or more timely, than the info we can get from asking SD Realtor or sdrealtor the following question: “What is your observation of price trends today?” These guys are going to be the first to know when prices change, even before my model or Campbell’s model gets a whiff of it. They will know within 2-3 weeks when the market has shifted, as they will see increased buyer interest, rising prices, fewer seller concessions. I wish we could backtest that question. Maybe we can: realtors, when did you first notice the market shifted?
Could the “ask the realtor” test be superior to any model?
ParticipantOne of my friends noticed that some properties she is following, have increased in price too. Neither of us could explain it.
Perhaps it’s a strategys. The sellers think raising the price makes their property more desireable, as in, “Come buy it today before it goes up even more!”
ParticipantThanks, jg, I have to admit I only know his area was “San Diego, CA”. So I assumed it was the city limits, but perhaps he used the whole county. His source is the SD Cty Recorders Office, so to be accurate, I would need to get the entire series.
ParticipantHey, leave Mydogsarelazy alone! Temecula is a beautiful area, and his posts are really good.
ParticipantVery interesting…. Great analysis! I remember looking through the monthly Dataquick charts in the U-T, and noticing that the lower priced areas like National City and El Cajon had the biggest percentage price increases. People were buying what was still affordable, pushing up the price even more.
Bugs will remember what happened to La Jolla.
ParticipantBased on my rent vs. current value, we needed a 55% reduction in my neighborhood. We dropped some, and now need a 45% reduction in home prices to get to 10x annual rent.
You can rent a 1800 sq ft house for $2200, a 2200 sq ft house for $2500, a 1600 sq ft townhouse for $1800. Every unit here is rented out – no vacancies.
ParticipantSD has 5,437 tax liens, 699 bankruptcies.
ParticipantIf London suburb lost 60% in a regular recession, put me down for 80% drops in Temecula, El Cajon, and other far-flung and less desireable areas. Mydogs must be a homeowner, hoping that his property values won’t drop. This brings me to another point: too many “housing bears” who cling tightly to the dream their property or town is special, and will have a soft landing. mydogs, you’re a great guy, love your posts, but the market will not step out of its way to save you. If you can’t handle the drop, sell now. Maybe you are a renter already; good.
Participantvcguy-10, Do you know of any product whose price is determined only by demand, where supply is irrelevant? If you do, I will accept your comment that I am “completely off” 🙂
ParticipantHe does have several wrong signals, namely the buy in 1/94, sell in 8/95, buy in 8/96, sell in 12/01, buy in 1/03. He gets all confused: what is it, buy or sell? He’s got people buying and selling every 18 months between Jan 94 and Dec 96. He is definitely wrong on the buy signal in January 2003! Again he had a wrong sell signal in December 2001.
Following his method, you’d be losing money in real estate, because he told people to be out of the market from 12/01 – 1/03, at time of great appreciation. In addition, the real estate commission incurred by buying and selling every 18 months is prohibitive. He has 3 buy/sell signals in 2 years between 1994 and 1996, and 2 buy/sell signals in 2001 – 2003. I only see his signals through 1/04, the latest date in his book which I just purchased.
Let’s not confuse the fact that Campbell is a nice guy with the fact that his model is poor at forecasting real estate cycles. Kudos to him for trying, but shame on him for misleading people into thinking that he has it figured out.
ParticipantFirst, kudos to jg for trying what few have done. How many people have ever tried to make a real estate forecasting model? So my hat’s off to you.
However, I’ve got be honest and point out the model needs a lot of work. I want to be very careful to show the weakness in the model while still holding jg’s work in high regard.
FormerSanDiegan is right. You’ve got a bunch of data, and made an equation that fit the prices. The model seems to break down in the early 90’s, a period of falling prices. Since it breaks down when prices fall, how useful will it be when prices fall this time? Furthermore, NODs are a lagging indicator, so by the time NODs rise, prices have changed for a year already.
The model does not use ALL sales, i.e. resales plus new home sales? As builders are discounting heavily now and have overbuilt, new home sales are a big proportion of all sales; later in the cycle, as builders have stopped building, new homes sales will be negligible. Any model using only new home sales or only resales is using only half the data, but skewed data: it is weighed toward lower sales in the up cycle (bec. new home sales are a bigger percentage) and skewed down in the down cycle (as new homes are a smaller portion of sales).
The biggest weakness in the model is that it uses only demand, while ignoring supply.. Econ101: price is determined by demand and supply. How can you predict prices knowing only demand? How can you predict oil prices without knowing the OPEC output? If you are given only world demand,but not world supply, how can you? The same is true for real estate, and it is Campbell’s greatest flaw, and the reason I believe he has so many inaccuracies in his model. Campbell has several incorrect sell and buy signals, yet he was satisfied with his model enough to publish it? The guy should refund me the money for the book.
jg, I want to commend you for taking a stab at it, and I encourage you to project it forward, and find out exactly how far off you are. Then refine it by adding more data on sales and inventory. Perhaps unemployment, new home permits, consumer confidence, have an impact too. I admire your tenacity. It was a big task.
ParticipantThe Poway rental market is HOT too. My friend rented her house out twice since early summer. A couple cruised our neighborhood writing down the realtors numbers from For Sale signs, hoping that a seller would rent to them. A house in good condition, well priced, will go fast. If the house sucks, or its overpriced, it will just sit…
Participantvrudny, great analysis! Can you copy the WSJ article, since it’s subscriber only? Now that oil prices are dropping, we’ll see a big reduction in UK purchase of treasuries. The late September auctions should be at higher rates. What about euros? I like gold, but after seeing its high volatility, I am getting more nervous about buying gold. How safe is my money when its value can fluctuate by 20% within a few weeks? That certainly does NOT inspire confidence.
ParticipantComing
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“San Diego housing bubble site
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