If you know several key real estate market indicators, you can make a better home buying decision or negotiate a better price. It may actually be a good time to buy if you know how to read your local housing market statistics. Remember, these are general guidelines and you are relying on statistics whose data may be suspect— but if the professionals know about the indicators, so should you. Remember to consider all indicators as they exist in your market– ignore national averages– they are do-do.
Real estate market indicators include:
P/R Ratio: Price to Own v. Annual Price to Rent
Sweet Spot: Buy when the P/R ratio is 15 or lower
In general, buy when the Price to Own v. Price to Rent ratio is 15 or lower. As the P/R ratio starts to fall, buyer (renter?) demand picks up and more sellers jump into the pool. The current national average 12.5 but look at YOUR local market ratio and compare the current P/R ratio against pre-housing boom ratios. Find relative P/R ratios for markets here.
How to calculate the P/R ratio: Divide the purchase price of a home (eg $500,000) by the annual cost to rent the home (eg $50,000) to get the P/R ratio (10).
When negotiating, point out the P/R ratio to the listing agent to help reduce the price. Besides, it will show the listing agent, you know your sh… stuff.
Unsold Housing Inventory:
Sweet Spot: Buy When Inventory Level is High
Generally speaking, a stable/healthy real estate market has about a 6 month’s supply of homes on the market. More than that is a supply glut (too many homes and not enough buyers– good for buyers), less is a demand boom (houses selling off the shelves– good for sellers ). You are in a better negotiating position when you know your market’s inventory level is high (so do the listing agents, though they won’t tell you).
Again, ignore national averages and look to your local market.
Quarterly Price Declines:
Sweet Spot: Buy When Home Prices Stop Declining Over 3-6 Months
The idea here is that smaller and smaller price drops over a quarter indicates a market close to stabilizing. When you notice stable prices in your market (no price drops over a quarter or two), you can feel some comfort that the declines are over. TIP: No need to rush in to buy because prices can stay flat for a long time before they start to rise again. As when looking at any stats, consider if there are other forces at work (eg. weather).
The National Association of Realtors publishes quarterly median home sales by metropolitan area (metro prices) here. NAR deals with median home sales– you should stick to local market comps. For the really adventurous, check the Zillow Quarterly Home Reports (these contain estimates of value of all homes, not just sold homes).
HOI: Housing Opportunity Index
Sweet Spot: Buy When HOI is Above 72
This one is based on some common sense (how refreshing)– until most folks can afford to buy homes in a market, sales will suck and houses will sit on the market.
The Index says a home is affordable if 28% or less of median family income is needed to buy it– so that’s an HOI of 72 or better. The National Association of Home Builders (NAHB) publishes a “housing opportunity index” (HOI) for 220 metro areas. Check your market HOI here.
Here’s a NAHB snapshot of HOI from 1Q 2008:
Foreclosures:
Sweet Spot: Buy While Foreclosures Are Still High
This is a lagging indicator since it takes 6 months or longer between mortgage loan default and foreclosure. So long as foreclosures are still rising, you can have your sweet pickins. By the time the foreclosures peak and begin declining, the real estate buying advantage may be starting to sour.
So, now you know some of the key indicators to check your market’s real estate health. Sweet.
Bonus Sweets: While the above are general market indicators, there are some old school methods for finding a good deal on a house in ANY market.
The following may be indicators of a motivated seller likely to cut you a sweet deal:
- vacant house – indicates a seller already bought a new house and is carrying 2 mortgages
- real estate agent not a local pro in that area– indicates an out of town seller who picked a name out of the book (or T Voices). Check the for sale sign for out of town realtors.
- death in the family — look for estate sales. Relatives can’t wait to divvy up the spoils
- divorce– the lawyers have to be paid somehow
- for sale by owner– without a broker to pay, you can get the savings
- houses for rent– the landlord may be tired of renting. It doesn’t hurt to ask.
- in states that use attorneys to close real estate deals, network with trusts and estates attorneys– these are the first to learn of deaths and estate property that will have to be sold.
- overgrown lawns and dirty pools–neglected homes indicate something is amiss
- read the ads closely for keywords– must sell, seller financing, seller relocating
Related Posts, Sources and Further Reading:
Real Estate P/R: Are You A Rental Case.
Housing Rebound: When to Spot One.
Metropolitan Existing Median Home Prices (NAR)
Money Magazine, August 2008.
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