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Back in April, I put up a long-term chart of the number of monthly home sales divided by the number of Notices of Default (NODs) in that same month. A summary of the reasoning behind the chart, explained at length in the original article, goes like this: price declines take place when there is a lot of “must-sell” inventory, meaning that buyers can’t wait around for the price they want but rather have to take whatever price they can get. The number of defaulting homeowners can provide an admittedly rough indication of how much must-sell inventory is or soon will be on the market. Comparing sales volume to the number of NODs can tell us how much demand is likely to offset the potential must-sell supply, thus providing a clue about the direction of pricing pressure in the months ahead.

The graph to the right is an update of the sales-per-default chart, with the Case-Shiller Index of single family home prices overlaid in blue. (Recall that due to data limitations, we are dividing the number of existing single family home sales by NODs on properties of all types. So the raw number is not very meaningful — what’s important is how a given month’s value stacks up against values past).

There are seasonal pressures to these numbers, so they are most useful when compared to the same month in prior years. To that end, you can see that the June 2007 reading was quite a bit worse than that of June 2006, representing a 60 percent decline in the number of sales per default. June 2007 also saw fewer home sales per default than June 1992, which by this measure was the worst June of the early-1990s downturn.

According to this model, then, June 2007 signaled more downward pressure on home prices than June 2006, not to mention any June on record. I hope this helps explain why I give San Diego’s serial housing market bottom-callers such a hard time.


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