Time to buy index

1st post on this so let me explain. After many years of advising clients on the housing market I developed an index to help me see what is going on in the market.

The index is designed so that in a perfectly valued market with house price increase flat the index will be at 0.

If property is undervalued the Time to Buy unadjusted will be negative and if it is overvalued the Time to Buy unadjusted will be positive.

The index will then be adjusted to produce a final index. The adjustments are based on a number of factors including direction of mortgage rate predictions, house price rises or falls and credit supply.

So I reckon that even though property may be overvalued at any particular time, the market sentiment may still drive the property upwards for many years. Obviously the opposite is also true. Hopefully the index will allow me to determine months in advance the time to advise clients to buy or sell.

So as of May the index stands at 465 unadjusted(U) and 680 adjusted(A)

This gives a guide that house prices are around 46% over valued and that market sentiment pushes that to 68% over valued. DO NOT BUY

That is not to say that house prices will fall by either, but it gives an idea of the direction.

Back testing produces the following

January 2008 476U 571A (house prices overvalued and sentiment says even more overvalued so the direction is predicted down) DO NOT BUY

September 2007 575U 689U (house prices overvalued and sentiment says even more overvalued so the direction is predicted down) DO NOT BUY

July 2007 645U 710A (house prices overvalued and sentiment says even more overvalued so the direction is predicted down) DO NOT BUY

January 2007 420U 439A (house prices overvalued and sentiment says about right so the direction is predicted level ish) DO NOT BUY

January 2005 269U 219A (house prices overvalued and sentiment says not so over valued, so the direction is predicted up) BUY

January 2002 -194U -230A (house prices undervalued and sentiment says even more undervalued so the direction is predicted upwards) BUY

January 1997 -78U -92A (house prices undervalued and sentiment says even more undervalued so the direction is predicted upwards) BUY

January 1995 -128U -102A (house prices undervalued and sentiment says not so undervalued so the direction is predicted level ish) BUY

July 1989 292U 389A (house prices overvalued and sentiment says even more overvalued so the direction is predicted down) DO NOT BUY

see also
http://thecrownblogspot.blogspot.com/2008/06/time-to-buy-or-not-index.html