Bill Carrigan, who writes 'Getting Technical' in the Toronto Star is getting into the act by charting average house prices and sales-on-balance. Sales-on-balance is tracked by adding the monthly volume if the average price goes up and subtracting the volume when the average price falls. Carrigan does this to determine whether it is a buyers or sellers market.

While the graphs look nice, the analysis is seriously flawed! Stocks are homogeneous - 100 shares are 100 shares - they are all the same. On the other hand, there is no such thing as an average price - if the mix of house sales changes, then average houses prices change even if there is no change in the actual price of an indiviual house! The second problem is that owners of shares can dispose of them or buy them at any time and can instantly react to economic changes. People buy houses first as accomodation and only secondly as an investment. As well, people can not buy and sell houses over night. The decision could take years and depends on a lot of non-economic factors such as marriage, divorce, children, and death.

Taking monthly volume changes as a proxy for understanding whether it is a buyer or sellers market is also flawed by the very seasonality of real estate. Why not just use the sale-to-listing ratio - people buying versus available product. Unfortunately, this is dismissed as not being a stock market technique.

While the whole exercise - trying to treat house sales as just another stock market investment - is good reading; I would not put much 'stock' (just a pun) in the results. Housing is not a rational market, even at the best of times.

If you want to try to foreast house prices, you need to realize that it is very geographic and property type specific. Also demographic and economic factors play a major role in the final price. What do you think about trying to build a model to predict house prices?

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