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Don’t let the lack of housing inventory sour you on the health of the market – 18 factors you can’t afford to miss
We built the Housing Tides Index so that we could better understand the health of U.S. housing markets and make superior, data-driven decisions. We needed a tool with which we could quantify and compare housing markets across time and geographies.
Typically, we report the headline Housing Tides Index value each month in a press release where we discuss important developments and notable things to watch. In the full Housing Tides Report, we publish all of the latest data we’ve gathered as it pertains to national housing market and each of the 41 major homebuilding metropolitan areas.
The Housing Tides team has categorized the 18 data points that we track each month by Demand, Supply and Financial indicators so that our readers can quickly discern the broad strengths and weaknesses within each market.
Demand indicators include things like the unemployment rate and housing affordability, as these things signal the health of housing demand. Other things equal, low unemployment and a low price-to-income ratio suggest that homebuyers have strong employment opportunities and can reasonably afford the homes available in their respective markets.
Supply indicators consist of things like housing inventory and homebuilder confidence, which tell us about the health of housing supply. These data give us information about the industry’s ability to deliver needed homes to the market and homebuilders’ outlook for the future, from which we can infer price and production trends.
Financial indicators are comprised of mortgage market indicators like prevailing interest rates, delinquencies and negative equity, which jointly paint a picture about the health of current lending and borrowing practices. The financial indicators give us an opportunity to identify the deterioration of financial markets as they reflect the strength and sustainability of loans outstanding.
By separating the overall Housing Tides Index into these component categories, we can glean information about which aspects of the market are healthy and which are not. We’ve all read the stories in the news detailing the lack of homes on the market, with bidding wars, waived contingencies and sellers afraid to list their homes in case they’re unable to find another place to buy. You may have even picked up on some key data points, like the fact that the inventory of homes listed for sale totaled just 3.1 months of supply in April given the current sales pace. However, without routinely tracking available data, putting it into context, and synthesizing into a bigger picture, this information is anecdotal at best and can be outright misleading. In fact, a little knowledge is a dangerous thing.
In this case, the anecdotal evidence can be confirmed by looking at each Index category isolated from the others. In the year and a half that we’ve been tracking the Housing Tides Index, the supply group is consistently the weakest aspect of the market. The supply variables in aggregate have averaged 58.7 on the 1-100 Index scale, considerably lower than the demand (78.1) and financial (77.6) indicators. Notably, in the last six months the demand and financial data have improved marginally while the supply indicators have weakened.
The current strength of consumers, their employment opportunities, and mortgage markets could become lost in the noise if we only pay attention to the accounts of the severe supply shortage in the nation’s major housing markets. To be sure, the low supply of housing is a real concern, but industry professionals that leverage the Housing Tides Report and Housing Tides Index to get a comprehensive picture of the overall market won’t attribute outsized influence to this facet of the market while the other aspects remain largely healthy.
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