When it comes to homebuying, people will often say, “I’ll just wait until the market cools off,” or “there’s definitely a bubble – prices will go down soon.” But, statements like these beg the question: is it really possible to anticipate real estate market trends?
Fortunately, the answer is…kind of. With a little planning and foresight, it is possible to keep an eye on the movement of the market and to use it to your advantage. Read on to learn what signs to look for and how to spot changes that are around the bend:
The different types of markets
Before you can understand what to look for as the market changes, you need to be aware of what the different types of real estate markets are. There are three distinct types to choose from and they each have their own identifying characteristics. They are:
- Seller’s markets: A seller’s market is the type that we’re dealing with right now. These types of markets are hallmarked by low inventory. Here, there are not enough homes for interested buyers to purchase, so there are often multiple offers against the same property. As a result, the seller can often receive their asking price, or above, for the property.
- Buyer’s markets: In a buyer’s market, the opposite is true. There is too much inventory for the amount of buyers who are able purchase at the time. As such, inventory has a tendency to sit for long periods of time, and property values drop. Here, buyers can get away with submitting lower-priced offers or asking for more in the deal.
- Neutral markets: Neutral markets are the ideal. In this case, the economy is stable, and there is the right amount of inventory for buyers. Property values also tend to stay the same.
Since monitoring the real estate market is all about tracking its changes, your first step should be to figure out what type of market you’re currently in. From there, you can begin to pay attention to the ways in which it moves by using the metrics below.
Keep an eye on mortgage interest rates
Mortgage interest rates have long been a symbol of the strength of the economy. Strong economies are synonymous with low interest rates, which lead to excess cash, and, ultimately, a host of buyers lining up to buy new homes. This sudden influx of buyers creates low inventory, and, eventually, an aggressive seller’s market.
Weakening economies, on the other hand, often have the opposite effect. As an economy struggles, interest rates naturally begin to rise. When that happens, the real estate market takes a downturn. Suddenly, fewer people can afford to buy, and property values begin to drop as a result.
Though interest rates are a clear indicator of the strength of the market, would-be investors should exercise caution before jumping into a market that seems to be solely driven by interest rates, rather than a mix of factors. Those markets are likely a housing bubble and not sustainable long-term.
Monitor housing inventory
Another factor to look at if you’re trying to predict the market is housing inventory, particularly among developers. Why? Developers are usually good at projecting how much inventory they can move in a current market. If they’re wrong, it’s a sure sign that the market is beginning to move in a different direction.
In a seller’s market, you can’t keep inventory on-hand long enough. Houses seem to go up for sale one day and be sold the next. Developers will sell out quickly before moving onto their next project. It can seem like new construction homes are popping up every day, especially if you keep an eye on up-and-coming areas.
With buyer’s markets, the opposite is true. Builders may begin developments, but there will be very few buyers looking to take them. Therefore, inventory will sit empty for many months – or maybe even years at a time. Finally, in a neutral market, sales will move at an expected pace, taking a few months to sell out.
Pay attention to rental and property values
The final factor to look at when trying to get a gauge on the real estate market is how rental values are faring, specifically in relation to property values. In a stable market, both of these will change at the same rate. However, in an unstable housing bubble, the property value will rise without seeing much change to rental values.
However, let’s focus on stable markets for now. In a seller’s market, you’ll see both property and rental values steadily rise over time. With a buyer’s market, the inverse will happen. You will see property and rental values begin to fall. Whereas, in neutral market’s they should remain fairly stable.
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