Market Update - Dane County

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Figuring out market movements aren't easy in normal times. So how can we make sense of things during COVID-19?

The best course that I have found is to get back to basics. In this case, that means following supply and demand levels. So let's get to it...

SUPPLY AND DEMAND LEVELS

Below we have two charts that illustrate the level of SF inventory in Dane County. The first goes back to 2000 and the second zooms in to focus on the past 5 years. Both use a 30-Day Moving Average for the data points.

The blue columns represent New Listings minus Accepted Offers. Total Inventory is the total Active SF homes at that time.

Before the recession, we never saw Accepted Offers outpace New Listings. We have now seen that occur at the end of every year since 2012. The big shock for 2020 is that Accepted Offers have outpaced New Listings in MAY!

This is a sign that the drop in Demand from COVID-19 is NOT proportional to the drop in Supply. In other words, enough buyers remain in the market to outpace the number of new sellers.

SUPPLY/DEMAND RATIO AND THE EFFECT ON PRICE

Below we have two charts that illustrate the Supply/Deman ratio for SF homes in Dane County. Also included is the AVG List Price over time. The first goes back to 2001 and the second zooms in to focus on the past 5 years. Both use a 365-Day Moving Average for the data points.

Supply/Demand = (Total Inventory / Accepted Offers)

Median S/D since 2001 = 107.52         Median S/D since 2015 = 62.27

Average S/D since 2001 = 139.57        Average S/D since 2015 = 70.17

When S/D is on the rise, crossing the Median level appears to be a good barometer that a shift has started. Crossing the Average level appears to confirm the shift and signal a coming downtrend for prices. When S/D is falling, the opposite appears true.

After falling since the peak in 2011, we seem to have hit the bottom for S/D. Starting in the second half of 2018, and culminating in early 2019, we see S/D hit the Median level for this period. It remained at this level pretty consistently until last month where we saw another push upward above the Median level.

Let’s zoom in again from here since this metric is somewhat lagged.

Below, we change the past 5 years to a 30-Day Moving Average. I also re-calculated the Median and S/D to reflect this change. The new numbers are 67.56 and 70.59, respectively.

Notice the low point for each S/D cycle. 2019 is the first year that the low point was higher than the previous year's low point. This trend was continuing in 2020, but now appears in jeopardy.

At the very least, this may be the first year that the peak S/D ratio does not cross the 67.56 Median level.

Below, we zoom in further to see just 2020. Here we use a 7-Day Moving Average to really get a sense of the market movements.

Shrinking the Moving Average from 30 to 7 shows that there have been brief movements above the Median and Average levels. However, these have been short-lived.

Ultimately, 2020 is showing even greater demand levels than was expected. The takeaway is that COVID-19 has caused our seller's market to amplify!

FINAL THOUGHTS

Of all the charts in this report, I consider the above to be the most important to watch moving forward. Real Estate is a slow-moving industry. Watching the day-to-day moves is fine if you’re a nerd like me, but for most, keeping up with long term trends will serve much better.

That said, market shifts can appear out of nowhere if you aren’t looking for them. Many were surprised by the downturn of the previous recession. Simply paying attention to the Supply/Demand ratio would have alerted anyone watching to what was coming.

The trend up began in late-2004. The trend was confirmed by mid-2006. This provided more than a year of preparation for those watching.

It is possible that our next downturn in prices will appear swiftly. The cause will likely be very different than the previous cause. One thing appears clear, however. A reversal in the current price trend is not expected in the next 12-18 months.