Real estate prices have been in the tank not just for months, but for nearly three years. This is one of the longest down market periods in real estate over the past century. Foreclosures are up and many people are adopting a “wait and see” attitude. One symptom of this is increased demand for apartments and other rentals. Everyone is afraid.
But how can you tell when the market is turning around?
Here are some important guidelines for understanding real estate in your city or town:
Remember, all real estate is local
Don’t judge your local market based on the national averages and what you hear on financial news shows or read in the paper. The national averages are revealing but they don’t really apply. All real estate markets are local, and economic conditions where you live determine how the market acts.
Keep an eye on local employment trends
Are more jobs coming to town, or are big employers leaving? People need jobs to buy houses. So if employment is on the decline, housing will be too. But if employers are relocating and offering jobs, and if the population is rising, that’s one of the best signals for the future of the local real estate market.
Track applications for building permits for residential projects
A subtle but important indicator is applications for permits. This tells you how much building is going to be taking place over the next year. Are applications rising or falling? If they are on the rise, it means that builders and developers believe the demand is there. They are not likely to invest in new construction if there is no demand.
Watch three local stats: inventory, time on the market and the spread
These are the three most important tests of local real estate trends. Inventory is the number of houses for sale. Normally, this number is divided by the average sales per month. The result is the number of months of inventory. If this is falling or remaining low, that’s a healthy sign. But if your area has more than 12 months of inventory, the market is still soft.
Time on the market is also important and easy to track. How long does it take to sell and, equally important, how is that number changing? If it took over six months a year ago, but today the average house is selling in three months, that indicates a positive trend in demand for housing.
The spread is the percentage difference between the list price and the sale price. If houses are selling within 5 percent or less of the list price, it’s a healthy market. If it is higher, then it indicates that the market is still weak. All of these statistics should be studied as part of a trend. Look back at least one year and try to spot the direction the market is heading.
Remember, bargains are not always bargains. Be a smart buyer
Getting a bargain price is great. But be smart and do your own research. Some properties, such as foreclosures, are sold “as is,” meaning any defects are your problem. Many foreclosed homes get that way because they have expensive defects, so always hire an independent home inspector to assure you that there are no unpleasant surprises waiting for you. (Check the American Society of Home Inspectors to find a professional inspector in your area.)
Michael C. Thomsett is author of over 60 books, including Getting Started in Real Estate Investing (John Wiley and Sons), and The Landlord’s Financial Toolkit and The Real Estate Investor’s Pocket Calculator (both Amacom Books Press). He lives in Nashville, Tennessee and writes fulltime.