After my brain was prodded by a discussion today at Chipman's blog on Months of Inventory, I did some MS Excel divination on the current real estate market numbers. To recap, as of March 31, we are seeing slower sales than last year, we are seeing a big increase in listings, and prices at all time highs.
For some historical context, in 2 of the last 3 previous real estate market downturns, we have seen new price highs in the first quarter of the year and subsequent declines, which are often sharp declines. The 3rd market decline saw a price peak in the second quarter.
In previous analysis, we have seen a very strong negative correlation (-0.81) between Months of Inventory and Quarterly Price changes when looking at the Fraser Valley Real Estate Board market statistics and I believe that this correlation can be helpful to predict future market price movements.
That said, I will go on record at this point and say that we are at the market top right now. Prices will not be this high again for at least 5 years and probably longer. The reason I say this, in addition to the reasons above, is that my "months of inventory price prediction tool" in MS Excel says so! I will explain.
To explain the tool briefly, I have made some assumptions about the sales rate and the listings rate which I think are fair, considering the trend today, and then, given the correlation, I have extrapolated quarterly price changes from there. Sales, I believe, will stay at a rate approximately -10% and -20% below 2006 levels (I used -10% for my tool). Active listings will increase throughout the year until October (this is in line with previous years and I have made sure to use fairly conservative numbers in the tool, in line with the current listings growth trend). This chart illustrates my assumptions. Months of inventory will be flat until June and then skyrocket to 9 to 10 months of inventory by year end. Surprisingly, this is with 'normal' seasonal changes starting from our current point.
The tool I have created says that we will likely see YOY price decreases in the Fraser Valley in August 2007. The tool also also suggests that by December YOY prices will be down 8-12% from December 2006. This will only be the beginning and prices will likely decrease a further 12-15% from the top after the end of the year through 2008. That said, it is difficult to say what will happen further than 6-8 months out though with any degree of certainty.
Will I be right on, close, or way off? Who can know? We will see. What do you think?