17 January 2009

The Real Estate Market Index

When one wants to describe the real estate "market," it's important to consider more than just price. Two important features of any real estate market are the number of houses sold and speed with which those houses sell.

Unfortunately, most people describe the real estate market like a typical commodity market -- by price alone. While this may make sense for deals that begin and end in seconds or when volume fluctuates in a narrow band (stocks, corn, etc.), it does not make sense with real estate -- where deals may take months to complete, and mismatched supply and demand are very important.

So that's why I created a Real Estate Market Index (REMI) as a better indicator of activity in "the market" [prior post]. The REMI combines median price, total number of sales and median days-on-market (DoM, how long before the house goes into escrow) into one statistic. It gives a much better indication of market liquidity -- a characteristic that is very much en vogue during this credit crunch.

For Example: Compare Mission Viejo's market conditions in February 2004 and February 2008: Although median prices are nearly identical ($495,000 versus $500,000), sales and median DoM are nearly reversed (142 sales averaging 8 DoM in 2004 versus 70 and 148 in 2008). REMI values reflect those differences: The 2004 REMI is 229, but the 2008 REMI is only 15.

Here's what the 2000-2008 REMI for Mission Viejo, CA looks like [click for larger image]:

Note that the market bottomed out about one year ago. Since then, prices continue to fall, but more transactions and fewer days on market mean that "the market" is working better.

Anyone with data and a spreadsheet can create their own REMI. Here's a template [XLS] that shows monthly data, weights and REMI values.

If you are interested in reading my paper on the REMI, click here.

Bottom Line: We cannot understand something until we measure it, and price measures miss important components of the real estate market. The REMI will help you understand.

2 comments:

  1. David: Nice graphs in your Excel sheet. Much nicer than my experiences with Excel. How did you make 'em?
    Don

    ReplyDelete
  2. Don -- you gotta dump excess lines.

    Read Tufte [geek porn] for the best on displaying quantitaive information :)

    ReplyDelete

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