By Steve Cook
You’re about to put an offer on a home, but you’re worried that prices will sink and you won’t get the best deal. You’re putting your home on the market and you want to get the most you can for it but you can’t wait forever to sell it. You’ve found a great deal on a foreclosure that looks like a great investment, but how will you know what will it be worth a year from now?
Wouldn’t it be nice if you had more than a guesstimate to guide you as you make one of the most expensive decisions in your life?
Probably the most important aspect of buying or selling a home is anticipating the market. Ironically, the local information you need is the most difficult aspect. Almost all housing forecasts and data focus on national averages and metro real estate markets, not the hyperlocal market you care about. Of course, there is no such thing as a “national” real estate market and using national price averages to figure out local price trends makes about as much sense as using a national weather forecast to make plans for a picnic in the park.
You don’t need a crystal ball or a lucky rabbit’s foot to foresee what your local market will look like in three to six months. All you need is a good understanding of the dynamics that shape supply and demand and hyperlocal housing information. Top economists and real estate professionals issue remarkably accurate short-term forecasts by applying a few principles to good data. You can do the same.
Supply and Demand. Housing economics, like most economics, is essentially a matter of supply and demand. If demand is greater than supply, prices rise. If supply exceeds demand, prices fall.
Prices will rise or fall to achieve a balance between supply and demand. Sellers set prices based on their best estimates and their own needs, but the list prices you see on websites tell only half the story. In fact, the list price is the ceiling price, especially in buyers’ markets like those of recent years. When inventory outpaces demand, the difference between list prices grows and the average time it takes to sell a home increases. When demand is greater than supply, the difference between sales prices and list prices shrinks, or sales prices exceed list prices, as often happened during the 2002-2006 boom when demand was white hot, and houses take less time to sell.
A number of factors affect inventory. Obviously, changes in demand increase or decrease supply temporarily and affect prices. But as prices rise, sellers seek to benefit and they list their homes, increasing supply. Conversely, price declines discourage sellers from listing their homes but they encourage bargain-hunting buyers. Inventory shrinks.
Why Employment is Important. The single most important local factor driving housing demand is jobs. Buyers can’t get loans if they are not employed. Jobs also impact supply. When people get laid off, they often sell to lower living expenses or lose their home to foreclosure.
Communities with low unemployment are adding jobs that create strong demand for both home purchases and rentals. Local workers can afford to switch from renting to homeownership. Newcomers are attracted by employment opportunities, and they need housing, which strengthens demand and improves prices. Better prices encourage local residents to sell their homes and buy new ones, which creates even more demand.
In communities with high unemployment, demand withers. Mass layoffs will hurt a housing market for months to come as workers lose their homes to foreclosure and leave the area to look for work. Communities with high unemployment develop housing markets full of foreclosures and rock bottom values.
Every month the Bureau of Labor Statistics issues unemployment rates for every metropolitan area in the nation. Unfortunately, these rates are issued about a month after the fact. Go to the BLS main page and enter the name of the city in the search box. From the search list, click on “Economy at a Glance” and you’ll be taken to a page with a wealth of local economic data, including several months’ worth of unemployment rates. Note the recent trend. Compare your local rate with the state and national average to get a feel for how your community stacks up competitively. Remember, today’s employment situation will shape housing prices for months to come.
Research Local Data. To understand the current and future picture for housing prices in your market, you need a sense of what inventory, employment and the current price picture looks like.
Mortgage Rates. Want to know which way mortgage rates will be headed in the future? Rates have an impact on demand. A great source is the folks who actually compile the weekly average of mortgage rates, Freddie Mac’s economists. From Freddie Mac’s home page, go to the top and click on “Media Room.” Look on the left hand rail for “Economic and Housing Research” and click on it. Read the latest monthly outlook commentary or simply read the chart for their predictions on mortgage rates in the months to come.
Accounting for Seasonality. Housing is a seasonal business. Families planning to move will buy during the spring and early summer so that they can move in time for the kids to enter school in the fall. College towns shrink during the summer months and fill up during the school year. Housing demand in resort communities reflects the seasonality of the resort, whether it is summer or winter. Because of the Internet and the ability to shop for properties year round on a computer, seasonality is less of a factor than it once was. Get a feeling for the seasonal swings in home prices in your market by reviewing month-to-month price changes that have not been seasonally adjusted. Factor up to a 5-10% swing in demand due to seasonality.
As you become familiar with data on your market, you’ll gain a unique perspective that will help you become a more successful buyer or seller. Remember, the name of the game in real estate is timing. Bargains exist today in every community, but a property is no bargain if it doesn’t appreciate within your timeframe.
For more information, visit http://www.realestateeconomywatch.com.
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