Will Home Prices Keep Going Up??? And Why....

This is not a basic read in that it requires getting a bit of understanding of real estate trending. Having said that, this is the best and most succinct explanation I've seen for understanding the dynamics behind the housing market price trends over the last 10-years and perhaps most importantly, as a viable tool (Cromford Index) for projecting forward.

July 19 - Price is a trailing indicator, meaning that it is one of the last thing to respond to shifts in supply and demand. The first thing to respond will be the Cromford Market Index. As long as values are above 110, prices typically rise, below 90 prices typically fall and between 90 and 110 they typically stabilize.  Prices have peaked or bottomed out approximately 6 months after any major crossover of the 100 mark.  This is due to time delays between contract acceptance and actual closing, delays in reporting final sales prices by the Maricopa County Recorder’s Office and slow moving consumer reactions to market shifts, or any combination of these.

The overlay below proves this point. The Cromford Market Index (in blue) peaked in April 2005 and sharply dropped. However prices (red) continued to rise until peaking 6 months after crossing over into a Buyer’s Market. Sellers who saw this shift (which were few) had 7 months to sell their property while prices were still rising and demand still outweighed supply.  After crossing into a Buyer’s Market, prices started to gradually fall, but the sharp decline occurred just as lending froze. As foreclosure inventory rose exponentially, lending became so strict that few buyers could qualify to absorb it (especially those luxury buyers over $500K since Jumbo financing went away almost entirely). This sharp increase in inventory, followed by a sharp decrease in buyers, resulted in the price collapse of 2008. The first-time home buyer credit acted as a speed bump to this decline, but it had little influence for the end result overall.

Today, the Cromford Market Index has been solidly in a Seller’s Market for two years. As long as it’s above 110 we can expect prices to continue rising for 6 months after measurement.  Once it gets closer to 100, that will signify that the peak of price is near, but that day is not today.

Cromford Daily Observation