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Three Cents Worth: Looking for the Magic Number

[Our numbers man Jonathan Miller is determined to end 2005 with a bang. In the graph below, he brings together three key metrics: Price per square foot (blue line), number of sales (red), and days on market (green). What's inside the circles? Only the secrets of the housing universe. Click on the image below to live larger.]

Everyone is looking to find THE Magic Number, the statistical indicator that will tell us where the real estate market is headed. There isn't one, but today's chart gives us some hints, and suggests that the rate of price appreciation could weaken next year.

It's always a good idea to look at the number of sales (volume of transactions) and see how it relates to days on market (how long it takes an apartment to sell). A surge in the number of sales usually means a drop in how long it takes to sell an apartment.

After the jump, a look inside those circles.

The highlighted circles show where the days on market and number of sales intersect. The cycles aren't always seasonal, as evidenced by the 18-month cycles in the chart.

When you throw price per square foot into the mix, it gets more interesting ... to me, anyway ;-). At the beginning of 2002 and the end of 2003, the change in average price per square foot intersects the number of sales and days on market. That suggests a brief period of equilibrium in the market at that time.

In the more recent intersection, the change in price per square foot seems a bit out of whack. That might mean the rate of price appreciation could weaken next year to levels seen in the prior two intersections.

Of course, sudden changes in the economy, the potential for rising mortgage rates, the inventory of units can all impact this pattern and make the chart completely useless. And for you numbers people, the data presented here are the percentage change as compared to the prior year quarter.
· % Change in Days on Market, Number of Sales, and PPSF [Miller Samuel]