Perspective is in the Eye of the Beholder

Perspective is an interesting thing. It can allow two different people to look at the exact same thing at the exact same time and come up with completely different opinions. 

I bring this up because I just read something interesting by another writer that I’d like to share: 

Have you seen the latest housing market stats that were recently released? It isn’t pretty, folks, and this market is nowhere near a bottom. It’s going to get worse before it gets better. Much worse! Why?
1. Inventory has tripled 

2 Sales are down despite more houses to choose from. 

3. Buyers are scared as they watch prices decline monthly. 

4. New building permits are down markedly! This is a key indicator, telling us the builders aren’t optimistic about the future. Take heed of this stat. 

5. Michigan and the Tri- County area in particular, is seeing a record number of foreclosures as sellers can no longer meet their monthly housing costs. 

The writer’s premise was that the real estate market here in the metro Detroit area still hasn’t hit bottom yet. Looking at her list, you wouldn’t disagree with any of it at first blush, would you? The data seems to completely support her premise. 

But does it? Let’s look at this from a different perspective, shall we? 

Points 1 and 5, inventory and the number of foreclosures, are what’s called lagging indicators, in that a new foreclosure or new REO is the result of something that took place as much as a 12-18 months prior. So these two indicators will likely continue to rise long after we have passed the bottom and started our way back up. So does this give us any indication at all as to the bottom of the market? Sort of – when this turns around we’ll know that we passed the bottom 12-18 months ago! 

Point 4, building permits, is directly a function of the market conditions that presently exist, and is therefore nearly irrelevant. Why? Well think about it. You have homes that sold for $1.4 million three years ago now selling for $800,000. And you have homes that sold for $140,000 three years ago now selling for $80,000. Why would you build in this area when you have the pick of the litter of homes in move-in condition that you can buy for 70 or 80 cents on the dollar? 

So far, none of these indicators is the least bit useful in predicting the bottom. How about the other two? This is where it gets interesting. 

Points 2 and 3 are the important indicators in the list, because they deal with emotion and buying behavior. But being emotion-based, they are beholden to and are therefore easily impacted by current events. Does that make them good indicators of the bottom? Not really. Why?
Because an improvement in the emotions of buyers will likely be the driving force behind an improvement in the real estate market in this area. 

So in fact, NONE of the indicators that the writer mentioned are useful at all in trying to pick the bottom of the real estate market in Southeastern Michigan. She was simply looking in the wrong place for her indicators. 

I believe that we have ALREADY hit the bottom in this market. I’ll go into it in more detail later. Watch this space . . .