Understanding House Prices

It’s hard to know if the housing situation is really improving.  Prices go up, but then units go down.  Classically, you can think of the equilibrium price vacillating around $200K, while the supply and demand curves do their dance.  Here is the raw data, from the National Association of Realtors.

Home SalesYou can see that prices have fallen since June, but units are still looking good (units are seasonally adjusted).  An obvious way to combine the series is simply to multiply them, and arrive at total sales in dollars.  Here, we want to use the mean price, not the median.  The realtors’ data includes unadjusted sales per month, but I think it’s best to use SAAR.

Home Sales2I was also curious to see what factors they use for seasonal adjustment,  Here they are:FactorsThese neat time series, though, obscure what’s happening with supply and demand.  That is, increasing demand with a static supply curve will clear more units at higher prices.  Increasing supply with a static demand curve will clear more units at lower prices.  Of course, neither curve is static.  That’s what I meant by “dance,” above.  The locus of the clearing price over time looks like this:

SwirlWe also have supply data, as units of inventory.  See how it tracks total dollar sales in that second chart.  Since inventory is inventory in the current month, I backed out the seasonal adjustments for this last chart, relating inventory to total sales.

ScatterThe regression plot shows that supply and demand are working as expected, and the swirl chart tells the story.  I have price on the vertical axis, so you can easily picture how the interaction of those two curves produced this locus.  If you have trouble with that, here is my favorite basic economics visual aid.Etch-a-sketch_inner

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