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 what will it be worth a year from now?
Wouldn’t it be nice if you had more than a guesstimate to guide your 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 hyper local 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 a 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 hyper local 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 what their best estimates and their own needs, but the list prices you see on Web sites 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 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 fromn 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. Workers can’t afford to buy homes and they become very conservative in their develop housing 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 or 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.
Sources for 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. Here are some good sources.
Altos Research. This research firm provides very current local data to real estate professionals, but anyone can subscribe. Plus you can find out a lot about your market by browsing their site. Each week Altos published reports on metro housing market analytics, including market forecasting indicators, and provides local market forecasts using its AVM, AltosEvaluate. You can also zero in on Altos’s interactive map to get hyper local price data and an index that tells you if the local market is a buyers’ or sellers’ market.
BlockShopper. This site is redefining hyper local real estate in 21 metro markets. You can find a list of recent sales and listings at the neighborhood level. With some surfing around, you can find sales data by neighborhood and you can locate the most recent sales of local properties comparable in size and quality to the house you are looking at. These prices will give you a good idea of what sales prices and appraisals will look like in the next three to six months.
Movoto.com. Movoto is a multi-state brokerage with a huge database of information garnered from local multiple listing services where it as a presence. It’s in 29 states and several hundred communities. Click on “Neighborhoods” on right hand side of the home page and scroll down to “Real Estate Market Stats.” There you can find an amazing assortment of current hyper local data by community, including inventory, prices and days on market. Like Realtor.com, Moto gives you the percentage change year to year and month to month, so you can easly see trends in price, demand and inventory. If you click on “Demographics” under “Real Estate Market Stats,” you can see current unemployment information and population growth or decline, which are indicators of future demand. Movoto covers communities that no one else does.
Realtor.com. The largest real estate site is now publishing its monthly sales, price and inventory data. To find it, go to the Realtor.com home page. On the left hand rail, go to “News and Trends,” and click on Real Estate Data.” You’ll see a spread sheet listing 146 markets with data on median prices and inventory. Though not hyper local, this may be the best data you can get on your market. It’s remarkably current and complete; the data you are looking at comes from 2.2 million listings in the previous month. Pay particular attention to month-over-month changes in price and inventory count. Compare the time in inventory in your market to the national median to get a sense of local demand; low is good, high is bad. Around 30-60 days shows the market is in balance.
Your Realtor. Last but certainly not leas is your Realtor. One of the advantages of working with a Realtor is their access to excellent information on the local marketplace, especially market data, and a Realtor’s expertise interpreting the data. Increasingly multiple listing services are providing excellent hyper local data services to Realtor members, like RBI in the Washington, DC and Baltimore markets. Also, the National Association of Realtors issues local market reports that your Realtor can access online and share with you. Ask your Realtor for a forward-looking competitive market analysis (CMA) for any property that you are interested in buying or selling.
A Word about AVMs. A number of national listing sites offer calculators, called automated valuation models or AVMs, that value properties on line. These use recent sales of comparable properties, known as “comps,” to arrive at a value. If you sign up for an AVM, it will regularly send you updates on individual properties or values for a zip code. AVMs vary greatly depending upon the quality of their data. Sign up for several and note the wide disparity in values for the same home. AVMs are a useful beginning point towards understanding the current and prospective value of a home, not the last word.
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 five to ten percent 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.