Signs Point to a Broad Spring Improvement

Employment growth has improved, consumer confidence reflects growing optimism, and affordability is at record levels driven by sub-4% mortgage rates.  The spring market is nearly here and there is much anecdotal evidence that it will be stronger than recent history.  One indicator, foot traffic, is the strongest that it has been in several years.

Each month NAR Research monitors data on the number of visits to homes that are listed for sale in roughly 160 real estate boards across the country.  This data is provided by SentriLock, LLC., the makers of those small lock boxes, which store the key used by REALTORS® to access and tour a home.   Foot traffic patterns are related to contracts for purchase and, eventually, home sales.  Consequently, there is a strong correlation between foot traffic and NAR’s Pending Home Sales Index (PHS) and Existing Home Sales trend.

One way to measure foot traffic is to look at a diffusion index.  A diffusion index is used to measure change across a panel of entities, in this case housing markets.  Each market in this sample is given a score of “0” if it is has experienced a decline in foot traffic during the recent period compared to a year earlier, “50” if it has not change, and “100” if it has expanded.  The average of these makes up the diffusion index.  A diffusion index above 50 suggests that the majority of markets are expanding relative to the same period a year earlier.

Growth in the diffusion index for foot traffic pictured above peaked at 77.7 during the summer of 2011.  This was the strongest point in more than four years and reflected a sharp improvement in interest for home purchases across many markets.  Traffic eased in August as concerns over the European debt situation and the battle in Congress over the budget raised questions about the economy, but record low mortgage rates helped to sustain strong growth in buyer interest through the fall.

The diffusion index for foot traffic has grown steadily since November and reached 77.6 in February of 2012, the second highest level in roughly five years.   Indeed, that means that roughly 77% of markets registered stronger foot traffic in February of 2012 compared to February of last year.  Given that it is still early for the spring housing market, the index is likely to rise as northern markets that tend to have a later spring market begin to reflect this pattern.

Foot traffic can provide valuable insights into the potential for home sales.  While growth in the diffusion index does not tell us how much stronger home sales volume will be this spring, it does suggest that the improvement will be more broad-based than any spring market since 2007 including the tax-credit period of 2010.