With all the constant news and information regarding the real estate market it is easy to get confused sometimes. One day you hear that interest rates are going up and housing market is in trouble for 2017. The next day you hear that there will be an increase in loan programs which will open the door for new buyers. The reality is that most real estate is done at the local level. Something happening in Ohio doesn’t have much impact on the market in New Mexico. It is important that you understand the markets where you invest and more importantly what influences changes in these markets. Knowing this can put you in front of a growing market or give you the heads up that it may be time to leave a declining one. Here are five key items that impact local real estate markets.
- Demographics. As we mentioned every real estate market has its own unique set of qualities. These qualities often determine just how strong, or weak, it is. Many of these qualities can be defined as demographics. Local demographics can be anything from the mill rate to the strength of schools. It can be unemployment figures, crime rates or average household income. To best gauge the strength of a market you need to look at as many of these figures as possible. Relying on just one of these can give you a misleading portrayal of the area. Finding demographics can be as easy as looking at information provided on the local town website. You can easily find the tax rates, crime figures, unemployment numbers, schools in the area, new housing permits and almost anything else you think is relevant. Real estate is done by real people in real towns. Demographics often hold the key for where the market will go next.
- Inventory. Real estate is also based on supply and demand. This certainly isn’t an earth shattering observation but is important to remember. If there is increased supply buyers are in a stronger position. They can pick and choose the ideal property for them. Since the buyer pool is reduced sellers are more open to negotiation. Buyers in markets with increased inventory can make the offer they feel comfortable with and if it is not accepted move on to something else. The trickledown effect to this is that home prices tend to be lower. Areas flooded with foreclosures and bank owned properties may seem like a goldmine but can actually be fool’s gold. You may be able to get the property at a discount but you will also have trouble getting it sold. On the flip side in markets with limited inventory sellers have the upper hand and can increase the list price of their properties. Buyers know that there are only so many houses to choose from if they want to stay in that market. Before making any offer always ask your real estate agent about the current inventory and changes over the last twelve months.
- Foreclosures/Short Sales. The overall number of foreclosures and short sales has been greatly reduced over the last five years. That being said there are still many markets that are not completely out of the woods. All it takes is one foreclosed property to have an impact in the market. When a foreclosed property sells it lowers the comparable sales for every other property. This has an impact on properties trying to sell or even refinance their homes. If there are multiple foreclosures it makes it difficult to pull values up. You can find current foreclosure numbers in town hall. Always look to see foreclosure volume as well as changes over the last six months. It is also a good idea to ask your real estate agent to provide you with a foreclosure sales chart. If the sales prices are greatly reduced it can have an impact in the town even if the foreclosures are nowhere near your subject property.
- Days On Market. Trends are nothing more than a snapshot of what has happened in the past and not a predictor of the future. Flat sales volume over the last year has nothing to do with the next twelve months. What you want to look for is the average number of days on the market. This tells you just how long, or quickly, homes have sat on the market before getting sold. Some of this is influenced by the current state of lending but most on buyer demand. If the average days on market have been shrinking it is a sign that buyers are coming out in full force. If the days on market are getting longer inventory could be poor or buyers are looking elsewhere. Either way it is a poor indicator of things to come.
- Price. Price is typically the bottom line for any market. As simple as it sounds if prices are rising the market is more desirable. If prices are falling sellers are looking to get out and buyers are looking elsewhere. When investigating price adjustments you need to look at as much data as possible. It is not uncommon for one or two high end sales to completely change the average sales price. This is why a median or a mean price number is more reliable. With these methods they throw out the lowest and highest sales and provide you a more realistic snapshot of the market.
Before diving into any market you need to know where it stands and where it may be headed. Use these five items to help determine the strength of your market.