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Latest Diffusion Index of Foot Traffic

Foot traffic is a strong leading indicator of future trends in contracts and closing for home sales. NAR Research monitors foot traffic patterns in roughly 170 markets. Traffic has been expanding in most markets since the spring of 2011. However, relative to August of 2012, foot traffic fell in the majority of markets in August of 2013, though the magnitude of the decline is not clear. This change likely reflects the recent increase in mortgage rates and tight inventories.

Every month SentriLock, LLC. provides NAR Research with data on the number of properties shown by a REALTOR®. Foot traffic has a strong correlation with future contracts and home sales, so it can be viewed as a peek ahead at sales trends two to three months into the future. For the month of August, the diffusion index for foot traffic fell 24.9 points to 34.1.

Mortgage rates have risen roughly 1.2% since May and stood above 4.5% at the end of August. This trend coupled with strong price appreciation has eroded affordability. However, inventories have been on the decline as well, limiting the top end of the foot traffic index to band between 60 and 70 since the fall of 2012.

This month’s reading is the first decline in the index since March of this year. March of 2012 was a particularly strong month for traffic, so that decline reflects the strength of the market in 2012. The index fell below the important “50” mark in August, which indicates that more than half of the markets in this panel had stronger foot traffic in July of 2013 than the same month a year earlier. This reading does not suggest how much of an increase in decline there was, just that the majority of markets experienced more foot traffic in August of 2012 compared to last month.

On a metro level, the decline appears widespread from high priced coastal markets to the Midwest and Southwest. It is not clear though whether tight inventories, higher mortgage rates or a combination of factors was the driver of this trend. While the decline in traffic from 59 to 34.1 was large, it is important to remember that this decline was from a high level a year ago during an atypically strong end of summer. By comparison, the decline in traffic that followed the expiration of the home buyer tax credit was much larger falling from 64.8 to 19.3 in a single month.

Foot traffic fell sharply in August likely reflecting the strong increase in mortgage rates, tight inventories, and strength of last year’s market. Consumers are likely to take a pause and to reevaluate affordability conditions this fall, but rates remain well below levels during much of the market expansion in the early 2000s and prices have yet to reach those peaks. A reversion to historic price growth would benefit the long-term stability of the market.

Ken Fears, Director, Regional Economics and Housing Finance

Ken Fears is the Manager of Regional Economics and Housing Finance Policy. He focuses on regional and local market trends found in the Local Market Reports and the Market Watch Reports . He also writes on developments in the mortgage industry and foreclosures.

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