The New Realities of the Housing Market

By Martin Brown

Whether you’re buying or a selling real estate, what’s happening on a national level is certainly of interest, but remember: There is no such thing as a national real estate market.

During turbulent economic times like these, that can be easy to forget.

And if we were to see a very broad downturn in the financial market— a disaster scenario as foreseen in recent days by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke—then indeed you would see a real falloff in all commercial and residential real estate values. But while that fear is out there and will hopefully diminish with today’s action by the Congress, the current upheaval in the housing market is unevenly distributed throughout the nation.

While the national media has been busy covering the precipitous drop in real estate values across the nation they have failed to widely report, for example, that nearly a third of the nation’s metropolitan areas are experiencing higher real estate values than a year ago. This is not all that surprising when you stop to consider that, over the past decade, various markets heated up and cooled off separate from any larger, and mythical, national real estate trend. Examples of that are found in Boston, Las Vegas, New York City, Albuquerque, San Diego, Portland, San Francisco, Los Angeles, and Miami. That’s, of course, not a full list, but each one of these metro areas experienced substantial jumps and various cool downs independent of one another.

The critical question for any single woman trying to sell or thinking of buying in the housing market today is simply this:If I can’t rely on national trends, how do I know if this is a time to hold, sell, or buy?”

Tthere are no perfect indicators, but there are some important criteria that real estate professionals use to evaluate whether a market’s property values are trending up or down:

1. Compare the existing inventory of homes with that particular market’s past performance.

What is the total number of homes for sale? And the number of days those homes are sitting on the market? What is the average number of days a house is on the market, in that town? That information won’t be just a Google click away, so insist on working with a realtor who has solid market information and is ready to get the answers you need to make an informed decision.

 

In a typical market there is a six-month inventory of homes: meaning that if no new homes went on the market, after six months there would be no available homes for sale. The average length a home stays on the market is 90 days. To compare these figures accurately, do a year-to-year comparison. You lose accuracy when you compare September sales to July sales. Why? Because different markets have different “hot” selling months. So always check that particular month’s previous year performance.

Use the job market as your litmus as to whether you should buy.

Job creation and unemployement are essential factors in assessing property values in a given market. If your specific town has a sagging job market, home sales will trend downward, and you’re better holding off on a purchase for a few months. If the job market begins to turn around, then jump in. Waiting on a purchase might save you thousands of dollars.

Check your area’s price-to-rent ratio.

A 15-to-1 ratio of price to rent is about right. It’s a simple equation to do: If the home you are interested in buying is selling for $500,000, a comparable home should rent for about $2,750 per month.

You’ll of course find that the ratio in  your neighborhood of choice skews lower or higher, but here again get your realtor to research what that ratio has been over the past two to five years. If you note wild swings upward in that ratio—say, a market that goes from a ratio of 13 three years ago, and today has a price rent ratio of 25—this is an indicator that its pricing is still in a bubble, and is quite likely to fall further.

Finally, if you’re looking at the rate of foreclosures as your principal indicator of your neighborhood’s health, be forewarned that foreclosure information runs six to twelve months behind real time numbers.

When this foreclosure crises peaks (if it hasn’t already) and starts heading downward, prices will already be on the rebound. The lag in foreclosure reporting would not have alerted you to that. Local job creation is a much better indicator of future activity.

Bottom line: Study a market carefully, demand thoughtful and thorough market specific information from your realtor.

A a buyer, your best assurance against the vagaries of the market is  a long term commitment (five or more years) to your new home. As a seller, you’ll always do well if you seek what you believe is a fair and reasonable price. Ultimately everything we do involves a degree of guesswork. That said, information is your best friend for improving the chances that you have guessed right.
 

Additional Reading

Living Large in the Small City

Hunting for Real Estate Bargains