Because there are only a half dozen or so indexes out there … sorry, I’m being told that’s actually a halfÂ *million*. Â Oh well, too late! Â I’ve already created the index and feel compelled to announce it. Â Drumroll …

### Easynomics Real Estate Price Stability Index (EREPSI)

First off, it’s clear that I picked the acronym first (it’s so catchy!) and worked my way backward to think of what it stands for. Â Anyway, let’s get to the why, what and how of the index.

**Why did I create this index?**

Simple. Â 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. Â I want to know how close we are to achieving a balanced state of equilibrium in the price of real estate. Â That is, are we close to a situation where there isn’t a bubble or a depression in any area of real estate. Â The best way I could think of capturing that was to look at three indicators that all relate to price stability. Â This is NOT a scientifically validated index with any special adjustments or complex calculations. Â I’m not using it to make investment decisions, and neither should you. Â It’s just an easy way for me to comment on housing in my weekly indicator roundup.

**What makes up the index?**

There are three components:

**New Homes Inventory Months of Supply**(Source: U.S. Census Bureau)Â – When there are too many new homes still left unsold (inventory) on the market, it usually means that prices will be dropping because supply is greater than demand. Â The opposite is also generally true. Â A good way of measuring the inventory is to calculate how long it would take that inventory to sell at the current pace of sales. Â The normal level for this is around 6 months. Â NOTE: Data for this indicator lags considerably.Â Â In addition to the index that is based on all available actual data, I will also calculate an index using the Easy Trends projection for the latest month, which basically assumes the recent trend will continue. Â If there is no projection from Easy Trends, I will assume the trend of the last several months will continue in a straight-line fashion.**Existing Homes Inventory Months of Supply**(Source: National Association of Realtors)Â – Same concept as “New Homes” above but with homes that already have an owner. Â NOTE: Data for this indicator lags considerably. Â In addition to the index that is based on all available actual data, I will also calculate an index using the Easy Trends projection for the latest month, which basically assumes the recent trend will continue. Â If there is no projection from Easy Trends, I will assume the trend of the last several months will continue in a straight-line fashion.**Price-to-Rent Ratio**Â (Source: I use the S&P Case-Shiller 20-City Composite Seasonally Adjusted Home Price IndexÂ for the price of homes and the Bureau of Labor Statistics “Owners Equivalent Rent of Primary Residence” for the rent component – setting the ratio of the two on January 1998 as 1.0. Â NOTE: Â The S&P Case-Shiller 20-city index actually started in 2000, but because I felt 1998 was a more “normal” starting point, I estimated what it would have been by using the ratio of another housing price index from 1998 to 2000.)Â – Comparing the prices of homes to the equivalent price of renting a similar home is a good way to gauge whether there is generally more incentive to buy or to rent. Â Based on what I’ve seen, the housing market was roughly in equilibrium around Jan 1998, so I have set this index to 1.0 for that time. Â So if this number is higher, it means home prices are more likely to fall. Â The opposite is true if the ratio is below one. Â NOTE: Data for this indicator lags considerably. Â If we are waiting on a particular piece of data (price or rent) to complete the calculation, I will estimate that data using the trend from the previous three months of data.

**How is the index calculated?**

The index is the equally-weighted average of the deviation from normal for these three components. Â Although there are a ridiculously higher number of existing homes than there are new homes, the sale of each new home is much more important to the economy (GDP), so I didn’t feel that I should weigh one more than the other.

Example: Â For a given month, if the new homes months of supply is 7.5, and the existing homes months of supply is 5.5, while the price-to-rent ratio is 1.10, the calculation is as follows:

- Deviation for new homes months of supply is 1.5 months (because normal is 6 months). Â 1.5/6 = 25% (rounded) –> I convert this to negative because it’s in the direction that hurts home prices.
- Deviation for existing homes months of supply is 0.5 months (because normal is 6 months). Â 0.5/6 = 8.33% (rounded) –> I keep this number positive because it’s in the direction that favors existing home prices.
- Deviation of price-to-rent ratio is 0.10 (because normal is 1.0). Â That’s 0.10 divided by 1.0 = 10% — I convert this to negative because it’s in the direction that hurts home prices.
- Final calculation is the average of: Â -25 percent, +8.33 percent and -10 percent = -8.89 percent.

What is the current level of the index?

What is the current level of the index?

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