What Are Real Estate Market Indicators and How Do You Use Them?

Real Estate Investing Market Indicators Here’s an article from Trevor’s real estate investing blog, theREIbrain:

When professional real estate investors make a move, they do it based on how they predict the market is going. True investors don’t just make an investment or enter a new area on a hunch… they do it because they see strong indicators for future growth based on hard facts and history.

If you are one of the people who makes their real estate decisions based on a guess… hunch… or what your friend said, you could be in for a hard lesson. Of course, anyone can make money in real estate when the market is booming in your area; however, it is the ones who know what to look for that will make huge money in real estate no matter what type of market it is.

So, what do you need to look for so you can get an edge and invest in areas when the market is right? You need to know the market indicators and what they mean. Some of this can be a little brain twisting, so I will go over these concepts in easy to understand chunks.

A Bit of Good Ol’ Economics

To understand these indicators more easily you need to know some basic economics. Remember back to that high school or college economics class? If not, maybe dust off that old text book and take a quick glance in it. I’ll try to summarize it for you as it relates to real estate.

Supply and demand. The basic theory that says the “market price of a good is the intersection of consumer demand and producer supply”. What does this mean to real estate? It means that there is a set price range that consumers will pay for real estate and builders, sellers, developers, etc. should try to supply only what consumers are willing to buy to optimize the price. In real estate, the demand sets the price. If nobody wants the real estate, it will be very cheap. If many people want the real estate, it will be higher priced and will increase (appreciate) more rapidly.

However, real estate prices and market conditions are not as simple as basic supply and demand. Things need to be researched such as why there is a high/low demand, what is driving home sales up/down?, what are people looking for in real estate?, are people making more money now?, etc. Of course, you want to look for markets that have a huge demand with a somewhat low supply for investing techniques such as flipping and wholesaling. These markets have great opportunity for growth. However, even markets with an oversupply of real estate and below average demand can yield decent profits through investing techniques such as lease options and buy and hold for rental.

Okay, back on track here. By now you might be saying, “I don’t need to know any of this because I will know when a market has gone bad or one is going strong“. You are exactly right. You will know when a market has gone bad or is going strong. But by then it may be too late. You want to know when a market will go bad and when a market will begin to boom. You want to know when the market is at its highest so you can sell off and take your profits… and when the market is at its low end just ready to pick up steam again so you can get in the market low and sell for huge profits later.

This is possible not by luck, but by following the market indicators and letting them show you the future long before most people will know.

Real Estate Market Indicators

Okay, here’s some indicators you should be familiar with. Some are more important to others, but all should be reviewed just so you know what you are looking at. Remember, when you are researching your market be sure to look at local numbers and statistics. Real estate values are always local in nature and don’t necessarily reflect what the national market looks like.

Housing Affordability - Guages the affordability of housing based on how well a borrower making the median income can qualify for a loan to purchase a home at the median price. The NAR index revolves around the 100% mark. A rating of 100% means that the median income earner has just enough money to purchase a median priced home assuming a 20% down payment. An index number of above 100% means that the median income earner has more than enough money to qualify for a loan to purchase a median priced home assuming 20% down. A rating of over 100% is ideal for a growing market and higher supply.

Population Growth - Is population growing or shrinking? In general, a growing population means increased demand for real estate. If the average growth over the years for your town is 3%, but a new highway was just finished that goes right through your town and is driving more and more people to discover just how great of a place it is to live… I’m sure the population growth will increase greatly. Let’s say it goes up to 10%. This is a market you will probably want to consider investing in. So look for good population growth.

Employment - Employment is a very good indicator. Is unemployment at an all time high because the auto plants are shutting down (as it is in Michigan)? If so, this may not be the best time to invest because people now don’t have the money to buy real estate and/or are leaving the area in search of new work. Employment is a very good indicator that can help you see an up or down turn in real estate early on. For instance, in North Carolina the real estate market is currently undergoing a boom. Many large corporations are moving into the state and bringing many job seekers with them. Those job seekers are upper-middle income wage earners and in need of housing. In turn, the housing market in North Carolina is booming. Noticing the influx of new jobs was a leading indicator a few years back that a housing boom was in the works. Those who invested then made a mint. However, the market is still booming and investment is very strong as we speak. So… look for low unemployment rates and healthy/growing industry.

Consumer Confidence - This is just as it sounds. How confident are consumers? A real estate market with high consumer confidence should do well. A market with low consumer confidence means that consumers are somewhat unsure about the economy and possibly about their future earning potential. Low confidence often reflects in the real estate markets as a decreased amount of potential buyers, which hedges prices down. Once again, consumer confidence is measured by the NAR (National Association of Realtors). A score of over 100 means consumers are confident… under 100 means consumers are less confident and the real estate market may reflect it. A high consumer confidence often comes with low unemployment rates and a strong economy.

Home Sales - Are homes selling? The sales of homes is an excellent indicator because it is a direct answer to whether the real estate market is doing well or not. If homes are sitting on the market for 120 days and inventories are at all time highs, real estate prices will hedge down and it will become a buyers market. If average time on market is very short and inventories are low, market prices will be higher and the market is ripe for quick “in and out” deals such as rehabbing, prehabbing, wholesaling, etc. Of course, home sales is usually somewhat of a following indicator. It is the result of other leading indicators such as consumer confidence, employment, affordability, and so on.

Interest Rates - How are interest rates doing? Often times interest rates can be an indicator. Lower rates tend to result in more qualified buyers and higher real estate prices. However, rates aren’t a hugely important indicator. If rates are high but consumer confidence is also high, the rates will make less of an effect on the market. Be on the lookout for cash flowing properties when rates are low. Sometimes a percentage point can be the difference between a positive cash flow and a negative.

Of course, there are still many other real estate market indicators that can help you to “predict” real estate trends but these will get you going.

For more of Trevor’s articles, tips and resources, check out his real estate investing blog.

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Top 8 Real Estate Articles of 2008 « Life as Real Estate Investors on December 31st, 2008 at 2:11 pm

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