An analysis by Burns has shown that the health of the market fundamentals such as demand, supply and affordability has proven to be a very good one- to two-year leading indicator for home price appreciation and decline. "By monitoring the early signs of recovery or decline in market fundamentals, our clients will be better able to prepare for the future," Burns says.

The Housing Cycle GPA assigns letter grades such as A, B, C, D and so forth to the current market cycle. "When the GPA increases from a D to a B, it is time to invest. When the GPA falls from a B to a D, it is time to divest," Burns explains.

As an example, the Housing Cycle GPA for San Diego indicates that 1984-86, and 1996-1997 were the times to invest, while 1989 and 2004-2005 were the times to divest. Right now, San Diego has improved from an F to a D, so it is too early to invest in San Diego, the Burns analysis indicates.

Research and analysis by the Irvine-based company show that demand is the most important indicator, but demand deserves more weighting in markets that have traditionally not been oversupplied or shifted significantly in price, such as in the Midwest. On the other hand, supply is a more significant leading indicator in markets that have few barriers to entry and have fluctuated wildly in supply, such as in Texas.

Affordability is a more significant leading indicator in markets with high barriers to entry where wild price fluctuations typically occur, such as the coastal markets in California. The GPA also reveals that, while most markets are faring well regarding affordability because of falling prices and historically low interest rates, extreme weakness in demand and relative weakness in supply mean that no metro area is currently earning a grade higher than a C.

Burns notes that, while the overall Housing Cycle GPA is very important, recent history and trends are just as important. Its analysis shows how the changes in the direction of the fundamental have played out historically, and what that means for the future.

For example, when the fundamentals improve after an economic collapse, "it is a time to consider taking more risk and planning on a recovery," the Burns analysis states. "Rising fundamentals usually means price appreciation is likely to occur. In some markets, the improvement has been almost immediate. In other markets, the improvement has taken several years."

By contrast, when the fundamentals erode near the end of an expansion, "it is a time to consider taking less risk," Burns advises. It says that the greatest price appreciation often occurs after the fundamentals begin eroding. "Therefore, declining fundamentals does not mean that you should sell all your holdings immediately. It just means that you should be forewarned that the risks are very high," it concludes.