With today’s economic reports on housing, I have now updated the Easynomics Real Estate Price Stability Index (EREPSI). To review, here’s some info on why I created the EREPSI:
Why did I create this index?
Simple. I see all kinds of housing indicators out there, but none of them seem to encapsulate in one number the thing that I’m personally looking for. I want to know how close we are to achieving a balanced state of equilibrium in the price of real estate. That is, are we close to a situation where there isn’t a bubble or a depression in any area of real estate. The best way I could think of capturing that was to look at three indicators that all relate to price stability. This is NOT a scientifically validated index with any special adjustments or complex calculations. I’m not using it to make investment decisions, and neither should you. It’s just an easy way for me to comment on housing in my weekly indicator roundup.
For more information on what this index measures and how it’s calculated, visit my introduction to the Easynomics Real Estate Price Stability Index.
As you can see from the chart, the level of the index is about 9.8 percent for February 2013, which is the most recent month for which we have actual data on months of supply for both new and existing homes. The value of the S&P Case-Shiller index for home prices is only an estimate, but it should be pretty close. Notice that the EREPSI moves back up to around 13.5 percent in March, but that is based on the assumption that the months of supply for both new and existing homes will keep going downward. That’s because we’ve seen monthly decreases there pretty much every month except for the most recent month. I would venture that we have reached the bottom for the months of supply and may be turning back up, which means when the actual values are put into the EREPSI formula, not just the projections, we’ll see the EREPSI begin to flatten or even drop back toward zero.
It’s GOOD to see the EREPSI go toward zero in my opinion, because it represents movement toward a state of equilibrium. It’s when we get way off equilibrium that the economy gets into trouble. We don’t want a housing bubble, and we don’t want a “reverse bubble” either.
I share an update of this index weekly in my Economic Indicators Roundup, so keep an eye out for it and see whether it begins to head back toward zero like I expect/want it to or not.