By Shelly K. Schwartz
RISMEDIA, March 14, 2008-(Bankrate.com)-The housing market these days can best be described as a moving target. Some metros have gone from white-hot to ice-cold in just a couple of years, while other cities are just now hitting their stride.
“There’s so much going on and so many different trends across the country that when you net them all out at the national level, it really doesn’t capture the wide variety of experiences going on in local markets,” says Rachel Drew, research analyst for Harvard University’s Joint Center for Housing Studies in Cambridge, Mass.
Indeed, the yo-yo performance of residential real estate makes it tough to take the pulse of the nation’s housing market, let alone determine where your own neighborhood falls on the recovery curve.
There’s no crystal ball. But for those looking to buy, sell or renovate, there are a handful of signs that may indicate whether a recovery is just around the corner in your neck of the woods.
Fewer ‘for sale’ signs
Perhaps the biggest indicator of housing market health is the inventory of available homes.
“Your No. 1 compass is inventory,” says Denny Grimes, a longtime real estate agent in Ft. Myers, Fla. “Drive around your neighborhood to get a sense of whether there are more signs going up for sale or fewer, and that’ll give you the best indication of where your market is turning.”
If inventory is growing, Grimes says your neighborhood is becoming a buyer’s market, which is broadly defined as an area with inventory of six months or more.
If inventory is shrinking, it’s leaning toward a seller’s market.
Drew agrees that inventory provides the best insight into the state of your local market.
“If there are a lot of comparable homes for sale and they’ve been on the market for a long time, that tells you there’s not a lot of activity in your area and there’s a strong wait-and-see attitude (among potential buyers),” Drew says.
A local real estate agent can also provide valuable insight on inventory trends, especially if you’re new to an area. Once inventory begins to shrink, it’s a sign that things are moving back in favor of sellers — and the overall real estate market.
Job growth is another important factor affecting home values, says Walter Molony, spokesman for the National Association of Realtors.
“If you are in an area with growing population and rising jobs, the picture for you is quite bright,” he says. “Around the country today, that’s the common denominator among markets doing well.”
For example, underlying strength in the local economy is helping neighborhoods surrounding several cities to produce solid year-over-year home-sale gains. Such cities include: Salt Lake City; Salem, Ore.; Farmington, N.M.; Beaumont/Port Arthur, Texas; Spokane, Wash;, Austin, Texas; and Raleigh, N.C.
Markets near Denver and Boston are also “in better shape than before,” Molony says.
However, job growth alone does not dictate the direction of residential real estate.
“Las Vegas and Miami are oversupplied,” Molony says. “Some of those have good fundamentals, but they’re in a temporary situation where they are overbuilt, so that affects prices.”
If you live near those cities, particularly in less desirable towns, it may be a while before home-price appreciation on your block returns to historic norms.
So, even though local job growth does not always guarantee a strong housing market, it certainly helps. Keep a close eye on the unemployment rate and other indicators of economic health in your community. The brighter the picture, the more likely it is that a real estate recovery is on the way.
Part of the reason the housing bubble burst, at least in the most overheated markets, is that average home prices grew disproportionately faster than average salaries, pricing many first-time buyers out of the market.
That, in turn, reduced demand.
Many of those would-be buyers continue to wait on the sidelines, hoping for a bargain and watching for signs that the market has reached a bottom.
If housing in your area has become more affordable to the average buyer, you’re likely to see property values rebound sooner. A few key reports can help you determine whether the dream of homeownership is becoming more attainable for local buyers.
In its “The State of the Nation’s Housing 2007” report, the Joint Center for Housing Studies provides a table of house price-to-income ratios for 150 of the largest metropolitan markets dating back to 1996. Although the most recent figures are for 2006, the table should give you an idea of housing affordability trends in nearby cities.
The National Association of Realtors also maintains a housing affordability index that measures the ability of a family earning the median income to purchase a median-priced home.
Over the last few years, housing costs ranged nationally between 20% and 24% of income. Anything less than 25% is ideal, says Molony.
As of September, NAR reports homeowners in the West continued to spend the greatest percentage of their income on housing (31.5%), followed by those in the Northeast who spend 24.5%. Homeowners in the South spend just under 20% on housing costs, while those in the Midwest spend the least, at just under 17%.
End of price reductions, concessions
It’s clear buyers still have the upper hand when homeowners are forced to slash their listing price two or three times before selling a property. So, when you’re talking with a real estate agent, ask how common price reductions have become in your neighborhood.
Real estate websites and newspaper ads also often make note of homes that have undergone a price reduction.
In a buyer’s market, you can also expect to see lowball offers and a growing list of repair demands. Sellers are also more likely to accept contingent offers, where the purchase is dependent upon the buyer selling their existing home.
Another sign of a cold market: Sellers who advertise their intent to pay a buyer’s closing costs.
If any of these trends begin to subside or even reverse, it may be a sign that your market is starting to heat up.
More new construction
The level of activity among local builders — both commercial and residential — can also be telling.
If builders announce plans to renovate a strip mall or begin construction on a town house complex on the other side of town, economic indicators are telling them demand is picking up.
If you’re game for a little reconnaissance, you might consider checking in with residential builders in the area.
If they’re slashing prices or throwing in pricey upgrades to unload their inventory, they’re still experiencing weakened demand. If they point you to a relief map filled with neighborhoods under development, your market may be on the mend.
Look, too, at your neighbors.
If they’re still investing in upgrades and renovations, you know they’re banking on the long-term viability of local real estate.
Positive changes in your neighborhood
Finally, as the old saw states, “all real estate is local.” Drew suggests taking mental note of trends on your block.
“Look for changes in your neighborhood that could impact property values,” says Drew.
For example, a proliferation of distressed properties — which may be boarded up or in a state of obvious disrepair — is sure to turn off prospective families in the market for a new home.
By contrast, a housing market in the midst of recovery has a noticeable absence of such homes. It will feature manicured lawns and fresh coats of paint.
For more clues, continue to do your homework. Talk to real estate agents, complete a drive-by inspection of homes in your area and read the news to determine which economic influences may affect local job growth, and ultimately demand for homes.
“Read with understanding,” Grimes says. “When you read an article about the nation’s housing numbers or even your state’s, remember that you could be in a niche market. There could be external environmental factors that would increase sales, like a new factory going up, which would increase (property) absorption.”