The Cromford® Market Index hit its recent peak for all areas & types on March 11. This peak value was 514.9, the highest ever recorded. Since then it has fallen back to 474. The CMI is mathematically designed to be a leading indicator of changes in the market balance between buyers and sellers. It is doing exactly what it was designed to do, calling out cooling in the market before it is detectable by any other means. It informed us that it could detect a slight reduction in demand, so slight that it was invisible to nearly 100% of active agents, buyers, and sellers. As time passes this reduction has become more obvious, but it is also leveling out. Demand is definitely lower than it was in mid-March, but the downward trend has lost momentum. However, the CMI is still moving lower because supply has recently started to creep higher. This effect is also pretty small, almost too small for many people to notice, but it is definitely visible if you study the numbers carefully enough.
I have received several emails questioning whether there could be something wrong with the mathematics because many agents believe the market is still getting hotter. There is nothing wrong with the math. The market is indeed on a cooling trend and when the CMI changes direction, we wait for other market measurements to confirm that trend. In fact, the current situation is very instructive because it shows us which measures are the most sensitive to change.
Obviously, the most useful measurements are those that report the news the earliest. However, we also need to see corroborating evidence before we pay too much attention to a single measurement. The Cromford® Market Index has now been joined by the Contract Ratio (see definition in MikeB Commentary) confirming that the balance between buyers and sellers is moving in the buyer's favor. On April 1, the contract ratio for all areas and types was 307.6 - a high we have never even approached at the start of any prior month. However, on May 1, the contract ratio is down to 239.9. This is still a market in a buying frenzy, but it is significantly lower than the April 1 reading and confirms what the CMI has been telling us since mid March. The frenzy is not as crazy as it once was.
If this still seems unclear, imagine that a shop sells candy bars that are very popular. It only has 5 candy bars but 50 people come to the store to buy them. They are sold out almost at once. The shopkeeper describes the demand as insatiable, but he is wrong - he should have ordered more candy bars. If he had stocked up with 100, he would still have plenty to sell. He has a supply problem. Next week he gets another 6 candy bars and marks them at a price 50% higher than the week before. 30 people come to buy them so he is still quickly sold out and everyone in the shop thinks there is overwhelming demand. Nope. There is an underwhelming supply. However, we do know the market has cooled since the first week. We used to have a 10 to 1 ratio between demand and supply, but now we only have a 5 to 1 ratio. Perhaps the price rise put some buyers off. Only if we do the math can we be sure the market has cooled. The shopkeeper still thinks demand is insatiable and most of the buyers are still unable to get what they want.
We have a similar situation in the Greater Phoenix housing market. Demand is slightly down and supply is slightly up, compared with March. It is probably extremely difficult to detect with the usual human senses, surrounded by listings selling well above list and many buyers frustrated by the number of offers they have made without success. But the numbers do not lie. Mathematics is a useful tool when used correctly.
It is unfortunate for home buyers that more homes cannot be ordered as easily as candy bars. Developers have many constraints which push lead times well into the future. But supply will improve gradually over time and demand will fall as prices rise, as long as buyers behave logically. Most home buyers have not taken leave of their senses and will pull out of the market once it becomes unaffordable for them. I cannot say the same about some stock market or cryptocurrency speculators.
The current market signals are the same ones that called a top in April 2005. If we follow the same pattern as May to December 2005 we could be in for big trouble. However, I do not think that is very likely. Between May and December 2005, the supply exploded from 30 days to around 90 days of inventory, a massive increase in supply. It is theoretically possible for that to occur in 2021, but looks unlikely given the tiny increase we have seen in supply so far.
The key issue is what happens to supply over the next 6 months - I recommend you keep a close watch on the Cromford® Supply Index here:
and here:
And to all our active listing and inventory charts.
We must remember that math is fairly easy and we usually get the right answer. Forecasting is very difficult and we all get it wrong more often than not.
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Above they use the term Contract Ratio. What it means:
Contract Ratio indicates how "hot" a market is. It specifically measures the number of completed sales contracts relative to the supply of active listings. It is defined as 100 x (Pending Listings + UCB Listings) / Active Listings Excluding UCB. The higher the number the greater the buying activity relative to supply. If this number rises then it is a sign of growing contract activity and a positive signal for sellers. Conversely a falling number is a sign of a weakening market - either supply of active listings is increasing or contract activity is slowing, or both. In a balanced market for normal market segments, the value of the Contract Ratio is usually between 30 and 60. When it lies below 20 the market can be considered "slow" or a "cold market". Above 60 can be considered a "hot market" and when it moves above 100 we regard this as evidence of a "buying frenzy". In high-end luxury market segments the normal level is lower, usually lying between 15 and 25.
Today's Cromford Daily Observation had more editorializing than we typically get. Not quite sure why they threw in the ringer on how we're mirroring 2006 - given all they've written on how our market is driven by entirely different dynamics. But then no housing analyst could have ever predicted the current state of affairs.
The takeaway is the Cromford Report bragging rights to an accurate short-term market predictor - the CMI (Cromford Market Index) and indices like the Contract Ratio.
I'll continue to provide these short-term forecasts for you, even as we also continue to monitor Collateral Analytics 5-year forecasts.
As I'm fond of saying, 'we may not have a crystal ball, but we can cite trends' - and that would be down to the subdivision level, where decisions are made e.g. Grayhawk:
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