The general rule is that more months of supply indicates a weaker housing market. Many months suggests plenty of homes are for sale or the pace of sales is slow. Those conditions are indicative of a market that favors buyers. Few months suggests a limited number of homes for sale or the pace of sales is fast. Those factors are indicative of a market that favors sellers.
Many local Realtor associations and multiple listing services, or MLS, collect and publish this type of information. Ideally, the data should be segmented by locale, type of home and price range, though that degree of specificity is rarely on offer.
Housing starts increase supply of for-sale homesTwo other important housing market indicators are residential building permits and new-home construction starts, according to Gabriel. Bernard Markstein, senior economist at the National Association of Home Builders, or NAHB, in Washington, D.C., agrees. These indicators are measured by local government building officials and the U.S. Census Bureau. A spike in permits or starts may indicate more optimism among homebuilders, but can also suggest a dramatic rise in the supply of for-sale homes in the near future.
Housing starts generally are a better leading indicator than housing permits because "housing starts turn into homes for sale very quickly," Gabriel says.
The NAHB's Web site offers access to a wealth of forecasts and economic and housing data from the association and government agencies.
Markstein also cites local employment trends and unemployment rates as important indicators of local housing market conditions.
"Employment is important because ultimately people need a place to live, and if people are moving into an area because employment is expanding, that will be positive for homeowners," he says.
Most local newspapers publish stories about large employers' hiring and downsizing plans as well as unemployment figures. Employment data also can be obtained from the Bureau of Labor Statistics.
Homebuyers and sellers can also glean useful insights from reports and newsletters published by the Federal Reserve and its 12 district banks, Markstein suggests. Each of the banks puts out its own periodicals about local economic conditions, and these reports usually contain sections about the outlook for commercial and residential real estate. The Fed's Beige Book and map of the district banks may help you locate these reports.
Quality of data is crucial to good analysisMuch like do-it-yourself remodeling, personal economic analysis is not without certain pitfalls.
Risks of do-it-yourself analysis:
- Inaccurate, incomplete, faulty or outdated data, which may be misleading.
- Small-scale surveys, which may suffer from sampling errors.
- Individual data points, which may not represent a true trend line.
It's important to track inventory, starts, unemployment and other figures over time and compare them to historical highs, lows and averages to understand their importance, Gabriel suggests.
"Look at these numbers relative to the typical level that would exist in a period of economic growth to see whether the levels are aberrantly high or aberrantly low. Look over a long time frame and measure existing levels relative to, say, a long-run average to get a sense of where (the market) is in the cycle," he says.
And remember: In housing markets, "a long time frame" usually means a number of years, not just a few months.