Inman

7 ways to say: ‘How’s the market?’

Every real estate agent is asked, again and again, to give an opinion on the market. And too often that answer is in the form of a one-word answer.

That’s a mistake. There is a better way to answer this question. In fact, there are seven better ways. These take your opinion, which most consumers will discount, out of the equation.

It is best to calculate all of the following indicators and use your local market statistics. Ignore national averages because they are less reliable. Compare ratios over prior periods of time and calculate these ratios for different property types (single-family homes, condos, co-ops, new construction) and price points (high-end vs. starter homes).

The suggested real estate market indicators:

1. House price to rent price (price-rent) ratio

It’s a simple ratio: house price divided by estimated annual rental cost.

The average national ratio for the 20 years before the bubble burst was 15. During 2005-2007 it was over 20. You should compare the current price-rent ratio in your market against pre-housing boom ratios and historical averages. Click here to view a chart that shows how the current and historical price-rent ratios may vary in different markets.

A more sophisticated own vs. buy tool, which incorporates interest rates, downpayment, property taxes and much more, can be viewed at this link: click here.

Arnold Kling, of the Library of Economics and Liberty, uses the Rule of 300, which states, "If the house price is less than 300 times the monthly rent on an equivalent house, it is OK to buy."

2. Unsold housing inventory

Generally speaking, a stable, balanced real estate market has about a six months’ supply of homes on the market and homes stay on the market for about 90 days. More than six months of supply can indicate a buyer’s market and a lesser supply can indicate a seller’s market. …CONTINUED

Buyers are in a better negotiating position when the market’s unsold inventory level is high. Ignore the national averages and look to your local market’s unsold inventory. Compare unsold inventory levels for the same period in prior years.

Remember to consider different property types and price points. Luxury housing may not move in the same direction as starter homes.

3. Quarterly price declines

History says that smaller and smaller price drops over a quarter indicate a market close to stabilizing. When you notice stable prices in your market (no price drops over a quarter or two), you can feel some comfort that the price declines are over. But this does not mean sales prices will soon rise. Prices can stay flat for a long time before they start to rise again.

The National Association of Realtors publishes quarterly median home sales price reports by metropolitan area.

While NAR deals with median home sales statistics for metro areas, which can be geographically far flung — you should stick to your local market comps and watch for quarterly and two-quarter stalls in sales price declines.

In diverse markets, compare housing types: single-family home prices may not be declining while condo prices are.

For the really adventurous, check the Zillow Quarterly Home Reports (these contain automated value estimates for all homes tracked by Zillow, not just sold homes). These statistics are for metro areas, too.

4. NAR’s Pending Home Sales Index (PHSI)

Published monthly by NAR, the index measures the number of sales contracts signed for single-family homes, condos and co-ops, providing a preview of future actual home-sales. Pending home sales become existing-home sales one to two months later, though a share of deals will always fall apart somewhere between signing and closing.

In October, pending home sales have increased for the seventh straight months — the longest in the series of the index, which began in 2001. …CONTINUED

5. Mortgage applications four-week moving average

The Mortgage Bankers Association (MBA) provides weekly loan application data for mortgages for both house purchases and refinancing. In addition, the survey also indicates the mix between fixed rate and adjustable-rate mortgages. This is a useful but mostly underused survey.

6. HOI: Housing Opportunity Index

The National Association of Home Builders’ HOI is based on the notion that until most folks can afford to buy homes in a market, houses will sit on the market, unsold. According to the index, an affordable house is one that can be bought with 28 percent or less of median family income, which translates to an HOI score of 72 or better.

NAHB publishes a "national" HOI every quarter. The national HOI has rated above 72 for the first two quarters of 2009. It was below 72 throughout 2008. And nationally, it has never been above 72 for the 18 years it has been calculated.

The HOI tracks 220 metro areas. Click here to look historical national HOI stats and your metropolitan area HOI stats to see if affordability is rising in your area.

7. Foreclosures: rising or falling?

This is a lagging indicator, since it can take six months or longer between mortgage loan default and foreclosure. So long as foreclosures are still rising, buyers can have their sweet pickings.

By the time foreclosures peak and begin declining, the real estate buying advantage may be starting to sour.

What market indicators have you found valuable in taking the pulse of your local market?

Joseph Ferrara is publisher of the Sellsius Real Estate Blog and a partner in TheClozing.com, a real estate news aggregator site. He is an attorney with 25 years of experience in New York, and he also coaches agents on the use of blogging and social networking.

***

What’s your opinion? Leave your comments below or send a letter to the editor.