Why is the listing volume the core indicator for tracking the real estate market situation?

Prologue

It has been over a month since the implementation of the "5.17" new real estate policy, however, the capital market continues to lower its expectations for the "real estate market recovery".

Taking the leading real estate development company Poly Developments as an example, the market had the most optimistic expectations for the "real estate market recovery" around the time of the "5.17" policy implementation. However, as it entered the phase of real-world validation, it did not pass the test, leading to a continuous downward revision of expectations. Especially after the release of May's housing price data, expectations were revised down to the level of January this year:

On June 17th, the National Bureau of Statistics released the changes in selling prices of new and existing residential properties in 70 large and medium-sized cities in May. Wang Zhonghua, Chief Statistician of the Urban Department of the National Bureau of Statistics, interpreted that in May, prices of new and existing homes in 70 large and medium-sized cities continued to decline, with the decline expanding; in terms of selling prices of new residential properties, 2 cities saw an increase compared to the previous period, with Shanghai leading the nation with a 0.6% increase.

Therefore, two important questions arise:

1. Why didn't the effects of the "5.17" new policy immediately reflect in prices?

2. How can we track changes in the real estate market before prices change?

Answering these two questions requires the use of "real estate agency listing volume," which is an extremely important indicator.

Why are housing prices continuously falling?

From the perspective of liquidity, there is no difference between housing prices and stock prices. The continuous decline in housing prices reflects that the liquidity in the real estate market is continuously contracting.

In the "Snowball Product Incident," we used a "on-exchange fund supply and demand model" to explain from a buying and selling perspective why asset prices continue to fall.

As shown in the above figure, during a wave of asset price declines, we observe a phenomenon where assets often continue to decline on shrinking volume.

Observing from the perspective of on-exchange fund supply and demand, we see two forces at play:

1. As asset prices fall, some investors are forced to sell due to margin calls, becoming [passive sellers], driving the demand curve to expand inertially;

2. Buyers realize the presence of [passive sellers], delaying their own purchases, and even waiting for [passive sellers] to completely clear before buying, thus, the power play suppresses the supply of on-exchange funds;

This model introduces an important variable, [passive sellers], who not only cause the demand curve to expand inertially but also lead to a tendency for the supply curve to contract.

Therefore, passive sellers are the fundamental reason for the continuous price decline. So, why do such people exist? Because leverage is commonly present in different markets.

Passive Sellers in the Real Estate Market

There are roughly two types of "passive sellers" in the real estate market:

1. Developers

Real estate development is a highly leveraged industry, where developers borrow a large amount of money to build houses and accumulate a large amount of inventory. When a developer's cash flow breaks, a spiral of "decreasing asset prices - increasing passive sellers" occurs: if Developer A encounters problems, it will lead to Developer B also facing issues, creating a huge pool of funds.

In this wave of developer crises, many people only see the "abandoned buildings" and do not pay attention to the domino effect. Therefore, they overlook the continuous negative impact of developers' cash flow tightness on the secondary housing market.

In fact, the initial problem that triggers the chain reaction is the developers. When they collectively face cash flow problems, the spiral of "decreasing asset prices - increasing passive sellers" begins. This creates immense pressure on the secondary housing market - with cheaper new houses available, funds that were originally meant to buy second-hand houses will be diverted.

Therefore, developers are an extremely important type of "passive sellers". If these developers continue to sell passively, it will be difficult for housing prices to bottom out.

Generally speaking, there are two ways to clear these developers:

1. Developers completely clear their inventory, which is a thorough clearance;

2. Government assistance, so developers are no longer forced to sell due to cash flow issues;

In hindsight, 2023 was actually the peak period of "developers destocking", which is equivalent to institutions dumping a large amount of chips into the secondary market due to redemptions in the stock market. Therefore, after a brief recovery in the property market, the entire market took a sharp downturn.

2. Ordinary Investors

In fact, ordinary investors also have a large amount of leverage, as many people only pay a 30% down payment. Additionally, many people own multiple properties for speculation, making their financial situation even worse.

Therefore, when property prices continue to fall, a large number of "passive sellers" also emerge among ordinary investors.

For these individuals, there is a natural bottom line: do not owe the bank money after selling the house.

Ultimately, in this round of decline, the "passive sellers" among developers and ordinary investors interact and reinforce each other, leading to a spiral decline in asset prices.

This also explains a question: why do real estate policies come out one after another, but prices fail to stabilize? The issue lies in these real estate policies not being able to completely clear out these "passive sellers", yet this is a system filled with leverage.

How to Track Passive Sellers

Now our problem shifts to how to track the number of "passive sellers". The signal for the market entering the right side is very clear: when prices rebound, the "passive sellers" have definitely been cleared out.

So, how do we track during the price decline process? This requires using the indicator of real estate agency listing volume.

During the process of asset price decline, the "passive seller" is an attractor that distorts the behavior of ordinary buyers and sellers:

1. It suppresses the speed at which buyers clear the listed quantity;
2. It attracts ordinary sellers to follow suit in listing, although these people may not actively push down prices, they will list together with others;

Therefore, the listed quantity is an important proxy variable for the number of "passive sellers". When the listed quantity is high, it means that the number of "passive sellers" is very large; when the listed quantity falls below a certain threshold, the "passive sellers" are cleared out, and we will observe price changes.

From the perspective of listed quantity, the "5.17" new policy has had a certain positive effect. Taking a well-known intermediary in Beijing as an example, the peak listed quantity this year was around 180,000 units. Although Beijing did not list any new properties after the "5.17" policy, the listed quantity has already decreased to 135,000 units.

Of course, there is still a distance to go before reaching the clearance level in terms of listed quantity. If we want to speed up the clearance process, it is obvious that Beijing needs to follow the policies of Shanghai.

Conclusion

In summary, we have found a complete framework for tracking the situation of property market clearance and explained a series of issues we are concerned about:

1. Why didn't the property market stabilize after the small spring in 2023? Developers did not clear their inventory, and they continued to move a large amount of inventory in 2023.

2. Why have round after round of policies failed to stabilize the property market? Because this is a high-leverage industry, the decline has brought about a large number of "passive sellers", and the policies implemented so far are not enough to clear this group.

3. How to track the situation of "passive sellers"? Track the listed quantity of second-hand properties through intermediaries, as "passive sellers" are the attractors behind the listed quantity.

4. Can this round of real estate policies stabilize the property market? It is much better than the situation in 2023, as a large number of "passive sellers" among developers have been cleared out, and now the main "passive sellers" are on the side of residents.

Finally, I would like to emphasize a few points:

1. Ordinary sellers or buyers are like grass on the wall, researching them is not very meaningful. In fact, their views also reflect the situation of "passive sellers", they just don't know it themselves;

2. For the vast majority of holders, as long as there are no financial problems, this storm is not very relevant to them. The pain is only emotional, the substantial harm appears on those "passive sellers";

3. The U.S. stock market itself does not pose much risk, the real risk comes from the U.S. property market, so it is important to track the U.S. property market:

The National Association of Realtors (NAR) data on Friday showed that existing home sales in May fell by 0.7% to an annualized rate of 4.11 million households. The inventory of existing homes for sale has recently increased, partly because those who have been waiting for interest rates to drop before selling their homes have decided they can't wait any longer. The median home price rose by 5.8% from the same period last year, reaching a record $419,300. At the current pace, it would take 3.7 months to sell all homes on the market, the highest level in four years. **

For any economy, the situation of the real estate market is crucial. Only when housing prices stabilize, is there hope for domestic demand.‍

ps: Data from Wind, image from the internet