How To Spot The Signs Of Recovery In Today's Housing Market

If you've been interested in buying or selling a home, but are unsure whether the timing is right, you're probably not alone. It's easy to lose perspective on our own local market amidst the barrage of news about the nation's housing market during this period of change. Still, to grasp what is really happening today -- and make a sound choice about buying or selling a home -- requires an understanding of what a normal real estate market looks like.

Here are some of the measures that indicate the state of a housing market.

Appreciation
Think the first six years of this decade were normal? Not by a long shot. Nationwide home values between 1980 and 2000 increased an average of 26.5% every five years -- or just over 5% per year -- according to data from S&P/Case-Shiller Home Price Indices. By contrast, average nationwide home prices between 2000 and 2006 increased 89% -- or roughly 15% per year!

It's no surprise some buyers and investors began to view homeownership as a short-term get-rich-quick opportunity rather than what it has always been -- a long-term investment that provides a dependable roof over one's head and some very valuable tax advantages.

Affordability
The fact that average nationwide home prices have declined in the last couple of years reflects a return to a healthier market where buyers can better afford the homes they want to purchase. Consider that the national average sales price of homes traditionally has been two-and-a-half times average household income. From 2004 through part of 2006, that ratio had soared to four times average income.

While homeownership rates hit record highs during those years, some buyers stretched their budgets too far in order to purchase homes and/or took mortgage loans they couldn't afford over the long term. Little wonder foreclosures increased.

Supply
The supply of homes for sale, relative to demand, has a major impact on the direction of home prices. In the housing industry, that relationship is expressed by "month's supply of inventory," which is the total number of new and existing homes for sale divided by the number of homes sold per month. Balanced markets (where neither buyers nor sellers have a particular advantage) have about a six-month supply of homes.

During the housing boom, where housing supply in some markets fell to one or two months of inventory, competing buyers bid up prices that resulted in double-digit annual appreciation rates. As inventory exceeds a six-month supply of homes, buyers begin to have an advantage when negotiating with sellers, and downward pressure on prices may occur.

Sales-To-List Prices
Another indicator of the direction of a housing market has to do with how close actual sales prices are to listing prices and how that ratio changes over time. Using statistics from the local multiple listing service, we can determine the average listing price of homes in a particular area over a specified period of time and compare that figure with the average sales price of area homes over the same period. If, for example, homes were selling at 92% of list price six months ago, but are now selling at 95% of list price, we know downward pressure on prices is easing, and the market is moving toward a more normal condition.

Local Factors Key
Although it may be satisfying to understand what is going on as the nationwide housing market returns to equilibrium, those trends have little impact on the housing market you may be considering buying or selling in. Housing markets vary widely by region, city and even neighborhood according to economic conditions and employment opportunities, housing inventory, community amenities, tax rates, transportation options, insurance costs, etc. In addition, local markets can change considerably from year to year, even month to month.

Looking at the very latest local data and trends is key to making a sound buying or selling decision in any particular market. That's one of the most important services we offer our clients. As local experts, we track the factors that affect our market and are happy to share that information with you. We can even help you craft strategies to take advantage of the opportunities available in the real estate market right here.

Want to find out more? Simply give us a call or send us an e-mail. There's no obligation -- we're always happy to hear from you!