Housing Economics Made Easy
Billings home prices are coming down this year.
But you don't have to take my word for it; I'm going to show you why. Economics can be tricky, but this time it's easy. Any basic economics class will teach you about supply and demand. We can use supply and demand to predict short-term price movement.
Supply is more commonly referred to as inventory when speaking of real estate. Demand can be measured by home sales.
Billings is exhibiting some classic symptoms that preceded every U.S. city's recent price drop. Supply is high, and increasing. Demand has been low, and is still dropping.
Here is the chart, which you can click to enlarge. It has a lot of information, so study it carefully. This shows supply (inventory, represented by the lines) and demand (sales, represented by the bars) over the last three years.
Even though housing construction plunged last year, inventory so far this year (yellow line) is off the charts compared to the previous three years. That's the supply.
Now look at the bars coming from the bottom of the screen. Sales were brisk in 2006 (blue bars), decent in 2007 (red bars), and really tanked in late 2007 (green bars). That's demand.
We overbuilt, so now our supply is high. Prices became unaffordable, so now demand is dropping. Your Intro to Econ textbook can tell you the rest; prices are on their way down. It really is that simple.
Great chart, thanks for all the updates. This will help me convince my wife to rent for a while. :-)
Not to turn this into the "Howard Sumners Watch Blog" but I found his comments on the January stats amusing.
"When you look at all the numbers below they would without careful understanding of the psychology involved and the underlying trends lead you to, like chicken little, to believe the sky is falling. I do not believe that is the case. Let me explain."
Interesting to note he reports only two (!) single family new home permits were issued in Jan.
The Helena Independent Reocrd just ran a fluff piece on real estate. Sadi all was holding steady except high end was slower and gee, gosh, new home construction was cut in half in 2008 meaning 2009 will be almost nil. But, of course, they have no economic sense so they made no correlation to supply and demand. You would think they would understand that given a growing number of their office mates are getting the boot as Lee Newspapers heads to oblivion due to what? No demand for their adverstising! Duh.
Oh, forgot to include the numbers for Jan 09 in my comment.
Jan 09 vs Jan 08
Residential sales closed: -48%
Residential sales pending: -38%
Residential inventory: +36%
Avg single fam sales price: -12%
Median single fam sales price: -8%
Based on those pending numbers we could see about -50% sales for Q1 09 vs 08.
Thanks, Anon#1, those numbers are getting crazy! I talked with Sumner a few months ago, and showed him my supply/demand graphs. He asserted that 1) Billings houses are still affordable, and 2) Low construction levels would cause inventory to drop. Looks like he was wrong on both counts. He wouldn't hear of the word "downturn," so when I left I simply pointed at the graphs and said, "Keep watching these, the story's right here."